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Exchange Rate Arrangements in East Asia: Lessons from the 1997-98 Currency Crisis

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  • Kawai, Masahiro

    (Japanese Ministry of Finance)

Abstract

This paper examines the evolution of exchange rate arrangements in East Asia's emerging market economies over the last 10 years. It considers both "official" and "observed" exchange rate arrangements in these economies from an international comparative perspective. By focusing on the roles of the dollar, the yen, and the euro as anchor currencies for exchange rate stabilization, the paper claims that the dollar played a dominant role as a de jure or de facto anchor for emerging East Asia until the 1997-98 currency crisis. During the crisis, the dollar's dominance naturally declined in affected East Asia as a result of a general shift to more flexible exchange rate arrangements. In the post-crisis period, the dollar has regained prominence in some countries (notably in Malaysia), while its dominance has been reduced and exchange rate flexibility has risen in others ( notably in Indonesia). Interesting is the observation that Korea and Thailand appear to have shifted to a de facto currency basket arrangement with significant weights on the dollar and the yen, similar to Singapore 's managed floating arrangement. This paper also considers what may be a desirable currency system for the region. Given the high volatility of yen/dollar exchange rates and partner diversity of trade and foreign direct investment (FDI) relationships, it claims that the emerging East Asian economies would be better off stabilizing their currencies to a balanced currency basket in which the dollar, the yen, and the euro play equally important roles. For infra-regional exchange rate stability, greater coordination on the currency basket policy would be desirable, and this needs to be supported by regional policy dialogue and financing mechanisms.

Suggested Citation

  • 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.
  • Handle: RePEc:ime:imemes:v:20:y:2002:i:s1:p:167-204
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    Cited by:

    1. Koichiro Kamada & Izumi Takagawa, 2005. "Policy coordination in East Asia and across the Pacific," International Economics and Economic Policy, Springer, vol. 2(4), pages 275-306, December.
    2. Anand Sinha, 2012. "Summary of the discussion," BIS Papers chapters,in: Bank for International Settlements (ed.), Financial sector regulation for growth, equity and stability, volume 62, pages 85-87 Bank for International Settlements.
    3. Benjamin Keddad, 2013. "Assessing Asian Exchange Rates Coordination under Regional Currency Basket System," AMSE Working Papers 1345, Aix-Marseille School of Economics, Marseille, France, revised Sep 2013.
    4. Kearney, Colm & Muckley, Cal, 2008. "Can the traditional Asian US dollar peg exchange rate regime be extended to include the Japanese yen?," International Review of Financial Analysis, Elsevier, vol. 17(5), pages 870-885, December.
    5. Koichiro Kamada, 2009. "The Stability of Currency Systems in East Asia --Quantitative Analysis Using a Multi-Country Macro-Econometric Model--," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 5(1), pages 109-138, October.
    6. Teo, Wing Leong, 2009. "Should East Asia's currencies be pegged to the yen? The role of invoice currency," Journal of the Japanese and International Economies, Elsevier, vol. 23(3), pages 283-308, September.
    7. Ramkishen S. Rajan, 2011. "Management of Exchange Rate Regimes in Emerging Asia," Macroeconomics Working Papers 23214, East Asian Bureau of Economic Research.
    8. Hiroshi Fujiki & Akiko Terada-Hagiwara, 2007. "Financial Integration in East Asia," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 25(S1), pages 57-100, December.
    9. 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.
    10. Yen Kyun Wang, 2008. "Flexible BBC Exchange Rate System and Exchange Rate Cooperation in East Asia," Trade Working Papers 21802, East Asian Bureau of Economic Research.
    11. Gunther Schnabl, 2009. "Capital Markets and Exchange Rate Stabilization in East Asia: Diversifying Risk Based on Currency Baskets," Chapters,in: Towards Monetary and Financial Integration in East Asia, chapter 10 Edward Elgar Publishing.
    12. Robert N McCauley, 2011. "The euro and the yen as anchor currencies before and during the financial crisis - comments on Moss's paper "The euro: internationalised at birth" and Takagi's paper "Internationalising," BIS Papers chapters,in: Bank for International Settlements (ed.), Currency internationalisation: lessons from the global financial crisis and prospects for the future in Asia and the Pacific, volume 61, pages 93-104 Bank for International Settlements.
    13. Ma, Guonan & McCauley, Robert N., 2011. "The evolving renminbi regime and implications for Asian currency stability," Journal of the Japanese and International Economies, Elsevier, vol. 25(1), pages 23-38, March.
    14. repec:wsi:serxxx:v:55:y:2010:i:02:n:s0217590810003778 is not listed on IDEAS
    15. Hiroyuki Taguchi & Harutaka Murofushi & Hironao Tsuboue, 2009. "Exchange rate regime and real exchange rate behavior," Economics Bulletin, AccessEcon, vol. 29(4), pages 2924-2936.
    16. Aggarwal, Raj & Muckley, Cal B., 2010. "Assessing co-ordinated Asian exchange rate regimes: Proposal for a possible move towards a common currency," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(2), pages 149-165, April.
    17. Hiroyuki Taguchi, 2009. "Currency Regime and Monetary Autonomy," Finance Working Papers 23076, East Asian Bureau of Economic Research.
    18. Schnabl, Gunther, 2005. "Der Festkurs als merkantilistische Handelspolitik : Chinas Währungs- und Geldpolitik im Umfeld globaler Ungleichgewichte," Tübinger Diskussionsbeiträge 291, University of Tübingen, School of Business and Economics.
    19. Masahiro Kawai, 2008. "Toward A Regional Exchange Rate Regime In East Asia," Pacific Economic Review, Wiley Blackwell, vol. 13(1), pages 83-103, February.
    20. Singleton,John, 2010. "Central Banking in the Twentieth Century," Cambridge Books, Cambridge University Press, number 9780521899093.
    21. Mansor H. IBRAHIM, 2007. "The Yen-Dollar Exchange Rate And Malaysian Macroeconomic Dynamics," The Developing Economies, Institute of Developing Economies, vol. 45(3), pages 315-338.

    More about this item

    JEL classification:

    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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