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Discussion Paper

Financial Globalization: Can National Currencies Survive?

Fixed exchange rate, pegs to hard currencies that can be adjusted, are fragile, the more so the more mobile are capital funds across currencies and national markets. Once market participants doubt, for whatever reason, the ability of a developing or emerging economy’s central bank to meet its commitment to redeem it currency in hard currency at the promised rate, they will race to claim the country’s external reserves. Vulnerability to crises becomes greater as financial markets become less regulated and more internationally open.