Pegged exchange-rate regimes were strongly defended by the International Monetary Fund (IMF) yesterday, despite the fact Thailand's currency crisis was sparked by fears over the strength of its previous peg to a US dollar-dominated basket of currencies. Presenting the IMF's flagship biannual World Economic Outlook, economic counsellor and research director Michael Mussa said that following the Thai experience - which culminated in a number of countries floating their currencies this summer - there was a mistaken belief that all countries should move to floating exchange rates. 'There are a number of highly successful developing countries that have maintained high growth and low inflation with quite rigidly pegged exchange rates - we are sitting in one of these economies right now,' he said referring to Hong Kong's peg to the US dollar. 'It is not, by any means, the only one. 'In Argentina we have another very successful example of a country that has used a rigid exchange-rate peg.' He said it was an error to say 'there is only one right way of doing things'. He cautioned it was equally mistaken that once an exchange-rate regime was set, governments did not adjust their other economic policies accordingly. 'It is increasingly true that a greater degree of flexibility in national exchange rates is a better policy option for many - but not necessarily all - developing countries,' Mr Mussa said. '[More flexible exchange rates give] greater flexibility when there is a series of capital flowing in by allowing the exchange rate to appreciate and communicate to the market that there are risks that the exchange rate can go not only up, but also down.' The World Economic Outlook said neither pegged nor floating exchange-rate regimes could be ranked above the other in terms of macroeconomic performance. It conceded countries with pegged exchange rates had until recently experienced lower and more stable inflation, although output growth did fluctuate in less flexible arrangements and could even lead to excessive movements if the peg was not adjusted in line with fundamentals. 'These findings do not imply that flexible exchange rates need necessarily be associated with high or more variable inflation in the future,' the outlook report said. 'Indeed, over the past several years, inflation in the developing world has come down sharply even as the number of countries adopting more flexible exchange-rate arrangements has steadily increased.' It said inflation rates for countries with pegged and flexible exchange rates were converging, reflecting the fact the increased role of financial markets had a disciplinary effect on national macroeconomic policies. Pegged exchange rates, it suggested, needed to maintain more flexible fiscal policies, as monetary policy would be subordinated to the peg and only the fiscal environment could absorb any economic shocks. In contrast, a more flexible exchange rate allowed for more control over monetary policy, but inflation was historically higher and more variable. 'These are some of the trade-offs that have traditionally made the determination of the most appropriate regime difficult,' the report said. 'The assessment is even more complicated when an economy is undergoing financial sector and structural reforms, which make the relative importance of monetary and real shocks difficult to ascertain.' Pegged regimes helped bring down inflation in the short term. Upon stabilisation, a more flexible arrangement might be preferable, Mr Mussa said. 'This option is particularly relevant when countries are faced with large capital inflows and a risk of overheating,' he said. The landmark report presented an optimistic assessment for global growth to edge up to 4.25 per cent this year and in 1998. While slightly slower than the rate projected in May, it would still be the fastest expansion in a decade, the report said.