An exchange rate is the price of one currency in terms of another. The movement over time of a currency’s value relative to a composite basket of currencies is given by an effective exchange rate index, in either real or nominal terms. Left entirely to market forces, exchange rates can be highly volatile. To manage exchange rate movement, central banks in Emerging East Asia intervene in foreign exchange markets to varying degrees. At one extreme, Hong Kong maintains a hard peg to the US dollar. At the other, exchange rate regimes classified by the International Monetary Fund as “floating”, but not “free floating”, are followed by Indonesia, Korea, Malaysia, the Philippines, and Thailand. Whether the regime is fixed or floating, mechanisms exist to maintain balance in international payments. The Indonesian case offers lessons in the challenges of exchange rate management. In the face of a balance of payments shock, such as a foreign capital inflow or outflow or a shift in export prices, the central bank "leans against the wind" to moderate appreciation or depreciation.

Based on a thorough analysis of the BIS Annual Reports from the early 1970s to the late 2010s, this chapter traces the evolution of the BIS’s thinking on the international monetary and financial system. It demonstrates how – as a result of the growth of the Eurocurrency markets in the 1970s and of the sovereign debt crisis of the 1980s – the BIS’s traditional focus on exchange rates and their potential impact on monetary stability gradually shifted to global capital flows and to the risks posed by an increasingly complex and interconnected banking system. The 1995 Mexico crisis and 1997–8 Asian crisis reinforced this shift and led to an overriding concern with the procyclicality of the financial system as a potential threat to financial stability. While recognising that the focus of the BIS on a macro-financial stability framework has contributed a lot to advancing the work of the Basel-based committees and standard-setting bodies, the chapter also concludes that not much progress has been made in coordinating monetary policies or in addressing the fundamental problem of excessive elasticity of the financial system.