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Synchronised Business Cycles in East Asia and Fluctuations in the Yen/Dollar Exchange Rate

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  • Ronald McKinnon
  • Gunther Schnabl

Abstract

Because many authors have proposed stimulating the ailing Japanese economy by monetary expansion and yen depreciation, we explore the repercussions of depreciating the yen against the dollar on the other East Asian economies¡Xwhich largely peg to the dollar. Since 1980, economic integration among Japan¡¦s neighbors¡XChina, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, and Thailand¡Xhas intensified and (except for China) their business cycles have been highly synchronized. These cycles have been closely linked to fluctuations in the yen/dollar exchange rate¡Xthrough changes in their export competitiveness and inflows of foreign direct investment. We show that a major yen devaluation would have a negative impact on incomes in other East Asian economies and that it is not a sensible policy option for Japan.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal The World Economy.

Volume (Year): 26 (2003)
Issue (Month): 8 (08)
Pages: 1067-1088

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Handle: RePEc:bla:worlde:v:26:y:2003:i:8:p:1067-1088

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  1. Frankel, Jeffrey A & Rose, Andrew K, 1996. "The Endogeneity of the Optimum Currency Area Criteria," CEPR Discussion Papers 1473, C.E.P.R. Discussion Papers.
  2. Ronald McKinnon & Kenichi Ohno, 2001. "The Foreign Exchange Origins of Japan's Economic Slump and Low Interest Liquidity Trap," The World Economy, Wiley Blackwell, vol. 24(3), pages 279-315, 03.
  3. McCallum, Bennett T, 2000. "Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 870-904, November.
  4. Ronald McKinnon & Gunther Schnabl, 2002. "Synchronized Business Cycles in East Asia: Fluctuations in the Yen/Dollar Exchange Rate and China’s Stabilizing Role," Working Papers 02010, Stanford University, Department of Economics.
  5. Tim Callen & Warwick J. McKibbin, 2001. "Policies and Prospects in Japan and the Implications for the Asia-Pacific Region," IMF Working Papers 01/131, International Monetary Fund.
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