Abstract
In the 90s, flexible anchoring regimes in emerging markets showed their fragility. Indeed, many exchange rate crises have hit these regimes, giving rise to a new consensus on solutions around the corner as the only viable exchange rate regimes. In reality, emerging countries are confronted not with the choice of one of the two solutions in the corners, but rather with the choice of the degree of rigidity — or floating — of the exchange rate. This Article elaborates on this issue. Compared to the existing literature, it stands out by developing both a theoretical and an empirical approach. The model fits into the literature with the identification of an exchange rate intervention index. Based on Aizenman and Hausmann (2001), we introduce the issue of price responsiveness to exchange rate fluctuations and debt financing of activity in both domestic and foreign currency. The main factors driving the choice of the optimal exchange rate regime are integrated into the analysis, namely: pass-through, relative volatility of nominal shocks to real shocks, discretionary bias, credit channel and balance sheet effect. The model is empirically tested on a sample of 43 developing countries.