Exchange rates: missing the targets

It is ironic that the strongest disciples of free markets are often the messiahs of currency pegs, fixed exchange rates and currency target zones. Those who believe the market should set the price for everything reject its decision on pricing international economic input and output.

Of course, fixed exchange rates and currency pegs can play a role at certain moments in history. They're useful when tackling hyperinflation (Latin America), or when a country's financial system is close to meltdown and policy makers lack all credibility (Bulgaria). Fixed exchange rates even provide a "permanent" anchor for small city states (Hong Kong).

But when it comes to big, populous countries and economic blocs, the market must be allowed to price all economic factors, as well as to punish policy errors and political uncertainty. The only way to ensure exchange-rate stability is to pursue the right policies. It is impossible, in today's world,...