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The Return to Soft Dollar Pegging in East Asia. Mitigating Conflicted Virtue

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Author Info
Ronald McKinnon (Stanford University)
Gunther Schnabl (Tuebingen University)

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Abstract

Before the 1997-98 crisis, the East Asian economies—except for Japan—informally pegged their currencies to the dollar. These soft pegs made them vulnerable to a depreciating yen thereby aggravating the crisis. To limit future misalignments, the IMF wants East Asian currencies to float freely. Alternatively, authors have proposed increasing the weight of the yen in East Asian currency baskets. However, dollar pegs are entirely rational from the perspective of each Asian country—both to facilitate hedging by merchants and banks against exchange risk, and to help central banks anchor their domestic price levels. Post-crisis, as the East Asian economies transform themselves from being dollar debtors into dollar creditors, they face “conflicted virtue”: pressure to appreciate their currencies that could lead to a defla-tionary spiral. Rather than undervaluing their currencies to promote exports as is commonly alleged, East Asian governments are trapped into returning to—and then maintaining—soft dollar pegs.

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Publisher Info
Paper provided by EconWPA in its series International Finance with number 0406007.

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Length: 38 pages
Date of creation: 30 Jun 2004
Date of revision: 07 Jul 2004
Handle: RePEc:wpa:wuwpif:0406007

Note: Type of Document - pdf; pages: 38
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Web page: http://129.3.20.41

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Related research
Keywords: Exchange Rates; Business Cycles; East Asian Dollar Standard; Original Sin; Conflicted Virtue;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
  4. Giancarol Corsetti & Paolo Pesenti & Nouriel Roubini & Cedric Tille, 1999. "Competitive devaluations: a welfare-based approach," Staff Reports 58, Federal Reserve Bank of New York. [Downloadable!]
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  5. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May. [Downloadable!] (restricted)
    Other versions:
  6. Wei, S.J. & Frankel, J.A., 1992. "Yen Bloc or Dollar Bloc: Exchange Rate Policies of the East Asian Economies," Papers 92-08, University of Birmingham - International Financial Group.
    Other versions:
  7. Eric Hillebrand & Gunther Schnabl, 2004. "The Effects of Japanese Foreign Exchange Intervention: GARCH Estimation and Change Point Detection," International Finance 0410008, EconWPA. [Downloadable!]
    Other versions:
  8. Esteban Jadresic & Paul R. Masson & Paolo Mauro & Michael Mussa & Alexander K. Swoboda & Andrew Berg, 2000. "Exchange Rate Regimes in an Increasingly Integrated World Economy," IMF Occasional Papers 193, International Monetary Fund. [Downloadable!]
  9. Rishi Goyal & Ronald McKinnon, 2003. "Japan's Negative Risk Premium in Interest Rates: The Liquidity Trap and the Fall in Bank Lending," The World Economy, Blackwell Publishing, vol. 26(3), pages 339-363, 03. [Downloadable!] (restricted)
  10. Ronald McKinnon & Gunther Schnabl, 2003. "China: A Stabilizing or Deflationary Influence in East Asia? The Problem of Conflicted Virtue," Working Papers 03007, Stanford University, Department of Economics. [Downloadable!]
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  11. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Ogawa, Eiji & Ito, Takatoshi, 2002. "On the Desirability of a Regional Basket Currency Arrangement," Journal of the Japanese and International Economies, Elsevier, vol. 16(3), pages 317-334, September. [Downloadable!] (restricted)
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  13. Fernald, John & Edison, Hali & Loungani, Prakash, 1999. "Was China the first domino? Assessing links between China and other Asian economies," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 515-535, August. [Downloadable!] (restricted)
  14. Schnabl, Gunther & Baur, Dirk, 2002. "Purchasing power parity: Granger causality tests for the yen-dollar exchange rate," Japan and the World Economy, Elsevier, vol. 14(4), pages 425-444, December. [Downloadable!] (restricted)
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  15. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2003. "An Essay on the Revived Bretton Woods System," NBER Working Papers 9971, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  16. Ronald McKinnon & Gunther Schnabl, 2004. "The East Asian Dollar Standard, Fear of Floating, and Original Sin," Review of Development Economics, Blackwell Publishing, vol. 8(3), pages 331-360, 08. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sajid Anwar & Desh Gupta, 2006. "Financial Restructuring and Economic Growth in Thailand," Global Economic Review, Taylor and Francis Journals, vol. 35(1), pages 113-127, March. [Downloadable!] (restricted)
  2. Frankel, Jeffrey A & Wei, Shang-Jin, 2007. "Assessing China’s Exchange Rate Regime," CEPR Discussion Papers 6264, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Alice Y. Ouyang & Ramkishen S. Rajan & Thomas D. Willett, 2007. "China as a Reserve Sink: The Evidence from Offset and Sterilization Coefficients," Working Papers 102007, Hong Kong Institute for Monetary Research. [Downloadable!]
  4. Ronald Ian McKinnon & Gunther Schnabl, 2008. "China’s Exchange Rate Impasse and the Weak U.S. Dollar," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  5. Gunther Schnabl, 2004. "International Capital Markets, Macroeconomic Stability, and Exchange Rate Stabilization in the CIS and East Asia," International Finance 0410009, EconWPA, revised 01 Mar 2005. [Downloadable!]
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