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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)

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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Bibliographic 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://128.118.178.162

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

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References

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  1. Eiji Ogawa & Takatoshi Ito, 2000. "On the Desirability of a Regional Basket Currency Arrangement," NBER Working Papers 8002, National Bureau of Economic Research, Inc.
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