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The East Asian Dollar Standard, Fear of Floating, and Original Sin

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  • Ronald McKinnon

    (Stanford University)

  • Gunther Schnabl

    (Tubingen University)

Abstract

Before the crisis of 1997-98, the East Asian economies ¡X except for Japan but including China ¡X pegged their currencies to the U.S. dollar. To avoid further turmoil, the IMF now argues that these currencies should float more freely. However, our econometric estimations show that the dollar¡¦s predominant weight in East Asian currency baskets has returned to its pre-crisis levels. By 2002, the day-to-day volatility of each country¡¦s exchange rate against the dollar has again become negligible. In addition, most governments are rapidly accumulating a ¡§war chest¡¨ of official dollar reserves, which portends that this exchange rate stabilization will come to extend over months or quarters. From the doctrine of ¡§original sin¡¨ applied to emerging-market economies, we argue that this fear of floating is entirely rational from the perspective of each individual country. And, although Japan remains an important outlier, their joint pegging to the dollar benefits the East Asian dollar bloc as a whole.

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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 112003.

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Length: 35 pages
Date of creation: Jun 2003
Date of revision:
Handle: RePEc:hkm:wpaper:112003

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  1. Rishi Goyal & Ronald McKinnon, 2002. "Japan's Negative Risk Premium in Interest Rates: The Liquidity Trap and Fall in Bank Lending," Working Papers 02006, Stanford University, Department of Economics.
  2. Leonardo Hernández & Peter Montiel, 2001. "Post-Crisis Exchange Rate Policy in Five Asian Countries: Filling in the "Hollow Middle"?," IMF Working Papers 01/170, International Monetary Fund.
  3. Slavi T. Slavov, 2005. "Should small open economies in East Asia put all their eggs in one basket: the role of balance sheet effects," International Finance 0501001, EconWPA.
  4. Jeffrey A. Frankel & Shang-Jin Wei, 1994. "Yen Bloc or Dollar Bloc? Exchange Rate Policies of the East Asian Economies," NBER Chapters, in: Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, NBER-EASE Volume 3, pages 295-333 National Bureau of Economic Research, Inc.
  5. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
  6. McKinnon, Ronald I & Pill, Huw, 1999. "Exchange-Rate Regimes for Emerging Markets: Moral Hazard and International Overborrowing," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 19-38, Autumn.
  7. Takatoshi Ito & Anne O. Krueger, 1994. "Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, NBER-EASE Volume 3," NBER Books, National Bureau of Economic Research, Inc, number ito_94-1.
  8. Peter Wickham, 2002. "Do "Flexible" Exchange Rates of Developing Countries Behave Like the Floating Exchange Rates of Industrialized Countries?," IMF Working Papers 02/82, International Monetary Fund.
  9. John Williamson, 2000. "Exchange Rate Regimes for Emerging Markets: Reviving the Intermediate Option," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa60.
  10. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May.
  11. Reinhart, Carmen, 2000. "The mirage of floating exchange rates," MPRA Paper 13736, University Library of Munich, Germany.
  12. 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.
  13. Kiyotaka Sato, 1999. "The International Use of the Japanese Yen: The Case of Japan's Trade with East Asia," The World Economy, Wiley Blackwell, vol. 22(4), pages 547-584, 06.
  14. Kawai, Masahiro, 2002. "Exchange Rate Arrangements in East Asia: Lessons from the 1997-98 Currency Crisis," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(S1), pages 167-204, December.
  15. Ramikishen Rajan, 2002. "Exchange Rate Policy Options for Post-crisis Southeast Asia: Is There a Case for Currency Baskets?," The World Economy, Wiley Blackwell, vol. 25(1), pages 137-163, 01.
  16. Carmen M. Reinhart, 2000. "Mirage of Floating Exchange Rates," American Economic Review, American Economic Association, vol. 90(2), pages 65-70, May.
  17. Andrew Berg & Paolo Mauro & Michael Mussa & Alexander K. Swoboda & Esteban Jadresic & Paul R. Masson, 2000. "Exchange Rate Regimes in an Increasingly Integrated World Economy," IMF Occasional Papers 193, International Monetary Fund.
  18. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
  19. 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.
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