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After the Crisis, The East Asian Dollar Standard Resurrected: An Interpretation of High Frequency Exchange Rate Pegging

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  • Ronald I. McKinnon

    (Stanford University)

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    Abstract

    For more than a decade before the great crisis of 1997-98, East Asian countries pegged "softly" to the U.S. dollar. In the period of currency chaos from mid 1997 through 1998 with exchange depreciations in eight East Asian countries, massive deflationary pressure in dollar terms which was unleashed in the whole East Asian region. Surprisingly, however, the post-crisis exchange rate regime in 1999 into 2000 again exhibits high frequency pegging to the dollar much like the pre-crisis regime. In 1999-2000, there was (is) a "honeymoon" effect where short-term rates of interest in the crisis economies remained unusually low so that hot money flows were temporarily muted. But this honeymoon will end as the crisis recedes in time. Finally, I explore how the informal "rules of the game" under which the East Asian dollar standard operates might be improved to (1) lengthen the term structure of finance-including exchange rate obligations-to make the system more resilient, and (2) tighten bank regulation so as to reduce moral hazard in international capital flows.

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    Bibliographic Info

    Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 042001.

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    Length: 39 pages
    Date of creation: May 2001
    Date of revision:
    Handle: RePEc:hkm:wpaper:042001

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    1. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
    2. Takatoshi Ito & Eiji Ogawa & Yuri Nagataki Sasaki, 1999. "How Did the Dollar Peg Fail in Asia?," NBER Working Papers 6729, National Bureau of Economic Research, Inc.
    3. Kawai, Masahiro & Akiyama, Shigeru, 2000. "Implications of the currency crisis for exchange rate arrangements in emerging East Asia," Policy Research Working Paper Series 2502, The World Bank.
    4. Ronald I. McKinnon & Huw Pill, 1996. "Credible Liberalizations and International Capital Flows: The “Overborrowing Syndrome”," NBER Chapters, in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 7-50 National Bureau of Economic Research, Inc.
    5. Ronald I. McKinnon & Kenichi Ohno, 1997. "Dollar and Yen: Resolving Economic Conflict between the United States and Japan," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262133350, December.
    6. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 329-368.
    7. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
    8. Reinhart, Carmen, 2000. "The mirage of floating exchange rates," MPRA Paper 13736, University Library of Munich, Germany.
    9. Carmen M. Reinhart, 2000. "Mirage of Floating Exchange Rates," American Economic Review, American Economic Association, vol. 90(2), pages 65-70, May.
    10. Ronald I. McKinnon, 1996. "The Rules of the Game: International Money and Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262133180, December.
    11. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    12. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
    13. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fixing for Your Life," NBER Working Papers 8006, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Alex Cukierman & Itay Goldstein & Yossi Spiegel, 2004. "The Choice of Exchange-Rate Regime and Speculative Attacks," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1206-1241, December.
    2. Juthathip Jongwanich, 2008. "Real exchange rate overvaluation and currency crisis: evidence from Thailand," Applied Economics, Taylor & Francis Journals, vol. 40(3), pages 373-382.
    3. Chow, Hwee Kwan & Kim, Yoonbai, 2006. "Does greater exchange rate flexibility affect interest rates in post-crisis Asia?," Journal of Asian Economics, Elsevier, vol. 17(3), pages 478-493, June.
    4. Teo, Wing Leong, 2009. "Should East Asia's currencies be pegged to the yen? The role of invoice currency," Journal of the Japanese and International Economies, Elsevier, vol. 23(3), pages 283-308, September.
    5. Ronald McKinnon & Gunther Schnabl, 2003. "The East Asian Dollar Standard, Fear of Floating, and Original Sin," Working Papers 112003, Hong Kong Institute for Monetary Research.
    6. Kwack, Sung Y., 2005. "Exchange rate and monetary regime options for regional cooperation in East Asia," Journal of Asian Economics, Elsevier, vol. 16(1), pages 57-75, February.
    7. 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.
    8. Oya Celasun, 2003. "Exchange Rate Regime Considerations in an Oil Economy," IMF Working Papers 03/26, International Monetary Fund.
    9. Juthathip Jongwanich, 2006. "Exchange Rate Regimes, Capital Account Opening and Real Exchange Rates: Evidence from Thailand," Departmental Working Papers 2006-01, The Australian National University, Arndt-Corden Department of Economics.
    10. Chow, Hwee Kwan & Kim, Yoonbai & Sun, Wei, 2007. "Characterizing exchange rate policy in East Asia: A reconsideration," Journal of Asian Economics, Elsevier, vol. 18(3), pages 448-465, June.
    11. Shu-ki Tsang, 2002. "Inflation Targeting in China?," Working Papers 192002, Hong Kong Institute for Monetary Research.
    12. Ramkishen S. Rajan & Tony Cavoli, 2006. "The Extent of Exchange Rate Flexibility in India: Basket Pegger or Closet US Dollar Pegger?," Working Papers id:424, eSocialSciences.
    13. Shu-ki Tsang, 2002. "Optimum Currency Area for Mainland HCina and Hong Kong? Empirical Tests," Working Papers 162002, Hong Kong Institute for Monetary Research.

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