Exchange rate policy and poverty reduction

The objective of this chapter is to evaluate the theoretical debate on the choice of an exchange rate regime in light of the empirical evidence with a view to suggesting appropriate exchange rate regimes that are conducive for poverty reduction. Due to its obvious implications for poverty, the chapter begins with a discussion of currency crises and devaluation. The recent currency crisis in Southeast Asia has also raised questions about the wisdom of capital account liberalisation (CAL). A brief review of issues pertaining to CAL and poverty reduction is presented in Section III. The reviews in Section II and III provide the background for the rest of the chapter, which is organised as follows. Section IV contains a brief summary of the development of exchange rate policies in the case study countries. Section V discusses pros and cons of three major exchange rate regimes, and reviews the empirical evidence. Section VI draws implications of the choice of exchange rate regimes for developing countries. Section VII contains the summary and recommendations.