Executive Summary v Chapter 1. Introduction 1 Recent ER Movements 1 Monetary and ER Regimes in the CCA 2 Assessment of CCA Currency Misalignments 9 CCA Financial Sectors 9 Capital Controls in the CCA 10 Central Bank Independence and Transparency in the CCA.12 Chapter 2. Exchange Rate Policy Advice 13 IMF ER Policy Advice and Rationale 13 Macroeconomic Policy Advice Under Current Conditions 15 Monetary Policy Modernization in Support of Greater ER Flexibility 16 ER Adjustment 16 Chapter 3. Impediments to Greater Exchange Rate Flexibility 19 Fear of Floating and Related Factors 19 CCA Central Bank Communications 22 Chapter 4. Managing the Transition to Greater ER Flexibility: Overcoming Obstacles 25 Addressing Fear of Floating 25 Modernizing Monetary Policy Frameworks 26 Addressing Risks to Financial Sector Stability 27 Improving Central Bank Communications 31 Chapter 5. Conclusions and Next Steps 34 References ..36 iv INTERNATIONAL MONETARY FUND BOXES Box 1. Modernizing Monetary Policy Frameworks 17 Box 2. Active De-dollarization Strategies: Peru and Armenia 29 FIGURES Figure 1. Bilateral Exchange Rate Movements 4 Figure 2. CCA: Nominal and Real Effective Exchange Rates 5 Figure 3. CCA Linkages with Russia and China.6 Figure 4. Financial Dollarization in the CCA .7 Figure 5. CCA External and Internal Balances. 8 Figure 6. CCA: Exchange Rate Misalignment .10 TABLES Table 1. CCA ER Arrangement AREAER Classification. 3 Table 2. CCA: Controls on Capital Transactions .11