financial managers (Country Commercial Guide, 1996, p. 8).
Flexible exchange rates first found favor among industrial countries in the early 1970s; the determination of the exchange rate arrangement and the choice of the currency "peg" (measure) became major policy issues for developing countries (Rothbard, 1994, p. 8A). This question took on more urgency in 1973 with the first oil price shock, and became important again in 1982 as the debt crisis began to unfold. Meanwhile, increasing numbers of developing countries were moving to flexible exchange rates, which caused concern in the developing countries. The problem was that, until recently, there had been a widespread belief that freely floating rates in developing countries would not work. The argument was that for countries to successfully operate market determined exchange rates, they would need very sophisticated financial structures, including forward and futures markets, that were often lacking in developing countries. There had also been a concern that floating the currency in the context of serious balance of payments difficulties could lead to a steep fall in its value; this, in turn, could adversely affect price stability and output in the short run (Ajakaiye & Ojowu, 1994, p. 1179).
There are two basic types of currencies which float: free and managed. Free currencies are not subject to direct government intervention and because there are literally billions of units of the money available for trade by buyers and sellers. Traders who purchased dollars one day may sell them the next for yen, and so are not tied to any particular currency for themselves or those on whose behalf they may be working.
Managed currencies are subject to intervention by their governments; such intervention is normally undertaken when the government perceives the national interest to be at stake. Governments have an interest in the value of their currencies because strong currenc...