Introduction

After the collapse of the Bretton Woods system a wide- ranging consensus emerged among academics and policymakers in the North, to adopt a floating exchange rate system. Few countries opted for an extreme floating device; however, even developed economies decided to move towards a managed or dirty floating scheme in order to reduce the market's volatility trends. EMEs, however, attempted to match their local currency to some base country currency (basically the US dollar, but also with the French franc or the British pound).

In any event, besides the abandonment of US dollar parity, the new model implied a wide process of capital account openness. Henceforth, and unsurprisingly, the new setting was pushing economic authorities towards the constraints dictated by the socalled monetary trilemma.

The term refers to the impossibility of simultaneously achieving the triple contradictory, but desirable, goals of sustaining an independent monetary policy (to achieve domestic monetary policy goals) and a fixed exchange rate (to foster stabilization of trade and growth), while simultaneously freeing its capital flow (for an optimal allocation of resources). According to the trilemma, a small, open economy cannot achieve all three of these policy goals at the same time: in pursuing any two of these goals, it must forgo the third. Theory, however, does not preclude national governments operating in the middle ground, as empirically observed since the 1970s. During the last decade most EMEs have been converging towards this middle focal point as policymakers ‘maintained moderate levels of monetary policy space and financial openness while maintaining higher levels of exchange rate stability’ (Chin, 2014, p. 6).

Assuming unfettered capital flows, policymakers were somewhat pushed to decide between two rigid alternatives: either ‘pegging’ the exchange rate and leaving interest rates to be fixed by the market, or gaining in monetary autonomy, although leaving the exchange rate to be freely determined by market forces. Theoretically, fixed exchange rate regimes are better fitted if shocks are nominal, whereas floating regimes are superior when the shock necessary to confront presents a real character.