This paper addresses analytical aspects of exchange rate policy and emphasizes particularly the relationships among exchange rate flesibility, financial discipline, and international competitiveness. It should be recognized at the outset that economic research has not reached a consensus on some of these relationships. Furthermore, the nature of these relationships depends crucially on the circumstances in which countries find themselves. Therefore, rather than formulating a position purporting to be of universal applicability, the paper develops separate analytical aspects of these issues, it makes no judgment on the appropriatemess of the exchange rate policy adopted in specific cases. Furthermore, although much of the analysis has general applicability and is thus equally relevant to industrial countries, it focuses here on developing countries.