Introduction

For many developing and Eastern European countries, the 1980s and early 1990s were years of macroeconomic upheaval. The debt crisis generated serious dislocations throughout the Latin American region: balance of payments deficits soared and inflation increased rapidly. In the former communist countries, on the other hand, the fall of the Berlin Wall was accompanied by serious macroeconomic disequilibria, large public sector deficits and very high inflation rates. During the last few years, most countries in these regions have embarked on major structural reforms and have struggled to regain macroeconomic stability.

Much of the policy discussion in these countries has centered on the most effective way of implementing stabilization programs. A particularly important question relates to the role of nominal exchange rate anchors as a device for reducing inflation and maintaining stability over the longer run. A number of authors have argued that fixed nominal exchange rates provide an effective constraint on the behavior of monetary authorities, introducing the financial discipline required for achieving price stability. Others, however, have pointed out that in a world of very high capital mobility, fixed exchange rates are ineffective anchors that introduce unnecessary rigidities and do not allow countries to react optimally to external shocks. This discussion has been particularly heated in the case of Russia. Jeffrey Sachs, for instance, has argued that a pegged exchange rate should be a fundamental element in any plan aimed at stabilizing the Russian economy, and has strongly criticized the IMF for not endorsing this position.