But the exchange rate regime must be adapted to the capacity of domestic policy and institutions to take the burden of adjustment. Where political or other factors make it difficult for domestic adjustment mechanisms to take the strain of reversals in capital flows, then the exchange rate has to be the safety valve.
If the exchange rate regime makes it difficult to make timely changes in the external value of a currency, then disequilibria can build up that add immeasurably to the abruptness and costs of the eventual adjustment. This is not just the recent experience of East Asian countries.