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Agustín G. Carstens

The choice of the appropriate exchange rate regime for any country is an issue that has been extremely important in the past and still is today. It is a policy decision that, to a large extent, conditions the macroeconomic framework of a country. This chapter discusses a number of issues related to this important decision. First it discusses the importance of choosing the exchange rate regime. It then analyzes the implications of the degree of exchange rate rigidity or flexibility for the domestic economy, particularly for other macroeconomic policies. Then it

Aerdt G. F. J. Houben

I. Introduction Exchange rate policy has played a key role in the changing fortunes of the Philippine economy. Exchange rate rigidity, in combination with expansive and inward-looking policies, fostered economic distortions and eroded external competitiveness in the 1970s, culminating in the debt crisis of 1983. Following two devaluations and a severe further tightening of exchange and trade restrictions, a fixed exchange rate strategy adopted in the wake of the debt crisis again foundered. Confronted by a binding balance of payments constraint, the