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


  • Ronald McKinnon
  • Gunther Schnabl


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 deflationary 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. Copyright Blackwell Publishing Ltd. 2004

Suggested Citation

  • Ronald McKinnon & Gunther Schnabl, 2004. "The Return to Soft Dollar Pegging in East Asia: Mitigating Conflicted Virtue," International Finance, Wiley Blackwell, vol. 7(2), pages 169-201, July.
  • Handle: RePEc:bla:intfin:v:7:y:2004:i:2:p:169-201

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    References listed on IDEAS

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    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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