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

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  • Ronald McKinnon
  • Gunther Schnabl

Abstract

Before the crisis of 1997/98, the East Asian economies-except for Japan but including China-pegged their currencies to the US dollar. To avoid further turmoil, the IMF argues that these currencies should float more freely. However, the authors' 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 had again become negligible. Most governments were 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, the authors argue that this fear of floating is entirely rational from the perspective of each individual country. And their joint pegging to the dollar benefits the East Asian dollar bloc as a whole, although Japan remains an important outlier. Copyright Blackwell Publishing Ltd 2004.

Suggested Citation

  • Ronald McKinnon & Gunther Schnabl, 2004. "The East Asian Dollar Standard, Fear of Floating, and Original Sin," Review of Development Economics, Wiley Blackwell, vol. 8(3), pages 331-360, August.
  • Handle: RePEc:bla:rdevec:v:8:y:2004:i:3:p:331-360
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    References listed on IDEAS

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    1. Hernandez, Leonardo & Montiel, Peter J., 2003. "Post-crisis exchange rate policy in five Asian countries: Filling in the "hollow middle"?," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 336-369, September.
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    JEL classification:

    • F3 - International Economics - - International Finance
    • 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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