Economists have argued since the 1930s about whether exchange rates should be fixed or allowed to float, says Jorge Braga de Macedo, the president of the OECD's development centre and professor of economics at Lisbon's Nova University.
The correct answer is neither, Prof de Macedo and his fellow professors, Daniel Cohen of the ╔cole Normale SupΘrieure and Helmut Reisen of the University of BΓle, conclude in Don't Fix, Don't Float, published this week by the OECD.
"Don't fix, in the sense of 'don't fix exchange rates fast'," Prof de Macedo qualified the maxim. "Don't float pure. Between the two extremes, there are a lot of solutions."
The book's novelty is its recommendation that Europe's experience of flexible regulation of exchange rates by central bankers - practised in the European Monetary System and Exchange Rate Mechanism until the euro was created - should be imitated by developing countries.
Regardless of whether they, like Europe, eventually adopt a single currency, the experience imposes a code of conduct and budgetary policy, and builds financial institutions. This, the authors say, is a surer path to credibility than the "quick fix" solution of pegging a currency to the dollar, deutschmark, yen or euro.
When Japan proposed regional monetary co-operation in Far East Asia four years ago, international organisations resisted the move. But they have since realised that regional monetary regulation is an instrument of stability.
Thailand initiated an agreement for Asian countries at Chiang Mai last year. Mercosur, which involves Argentina, Brazil, Paraguay, Uruguay, Bolivia and Chile, is moving towards co-ordination between central banks, and the English-language countries of west Africa - Nigeria and Gabon - hope to link their monetary system to surrounding French-speaking countries by 2004.
There is no "fast track" to financial credibility, no substitute for efficient domestic institutions, the authors stress. "No country can do without a system of monetary discipline," Prof de Macedo said. "They can do it alone but it's better if they do it as a region."
"Every country that tried the fast route - Chile, Argentina, Mexico, Brazil - failed," Prof Reisen said.
Argentina is the example cited most often. Under former president Carlos Menem, the country pegged its peso to the dollar, mistakenly believing that it could "import" US security, stability and credibility. The dollarisation of the economy seemed to work miracles but it eventually failed because of a lack of budgetary discipline.
Furthermore, Prof Reisen explained, "the dollar was the wrong anchor, because only 8 per cent of Argentina's exports go to the US, 30 per cent to Europe and the rest to Latin America".
The authors are more optimistic now that a former colleague from the development centre, Harvard economist Domingo Cavallo, returned to Buenos Aires to loosen the dollar-peso tie. As economy minister, Mr Cavallo has established a basket peg, linking the peso to the euro as well as the dollar.
More countries are expected to follow Argentina's example in tying their currencies to both the euro and dollar.
A colourful vestige of Argentina's crisis is the pseudo currency known as the patac≤n - IOUs in the form of postage stamps, paid to civil servants by the local government.
One can pay bills with the patac≤n but at reduced, not nominal, value.
Prof Cohen gave a similar example of fixed rates failing in the CFA zone of former French colonies in Africa.
The zone was long considered a model of stability but underwent a spectacular devaluation in 1994.
"Systems of fixed rates that seem to give more credibility to countries than they deserve amplify periods of growth and periods of crisis," Prof Cohen explained.
"Since the CFA franc was indexed to the French franc, it suffered the same misfortunes vis-a-vis the dollar."
The experience proved that developing countries are too vulnerable to financial instability to absorb setbacks in bigger, developed countries, and that it is very dangerous for a country to fix its rate to a single currency.
