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After the Crisis, The East Asian Dollar Standard Resurrected: An Interpretation of High Frequency Exchange Rate Pegging

  • Ronald I. McKinnon

    (Stanford University)

For more than a decade before the great crisis of 1997-98, East Asian countries pegged "softly" to the U.S. dollar. In the period of currency chaos from mid 1997 through 1998 with exchange depreciations in eight East Asian countries, massive deflationary pressure in dollar terms which was unleashed in the whole East Asian region. Surprisingly, however, the post-crisis exchange rate regime in 1999 into 2000 again exhibits high frequency pegging to the dollar much like the pre-crisis regime. In 1999-2000, there was (is) a "honeymoon" effect where short-term rates of interest in the crisis economies remained unusually low so that hot money flows were temporarily muted. But this honeymoon will end as the crisis recedes in time. Finally, I explore how the informal "rules of the game" under which the East Asian dollar standard operates might be improved to (1) lengthen the term structure of finance-including exchange rate obligations-to make the system more resilient, and (2) tighten bank regulation so as to reduce moral hazard in international capital flows.

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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 042001.

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Length: 39 pages
Date of creation: May 2001
Date of revision:
Handle: RePEc:hkm:wpaper:042001
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  1. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 329-368.
  2. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fixing for Your Life," NBER Working Papers 8006, National Bureau of Economic Research, Inc.
  3. Ronald I. McKinnon & Kenichi Ohno, 1997. "Dollar and Yen: Resolving Economic Conflict between the United States and Japan," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262133350, June.
  4. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  5. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  6. Takatoshi Ito & Eiji Ogawa & Yuri Nagataki Sasaki, 1999. "How Did the Dollar Peg Fail in Asia?," NBER Working Papers 6729, National Bureau of Economic Research, Inc.
  7. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  8. Reinhart, Carmen, 2000. "The mirage of floating exchange rates," MPRA Paper 13736, University Library of Munich, Germany.
  9. Ronald I. McKinnon, 1996. "The Rules of the Game: International Money and Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262133180, June.
  10. Carmen M. Reinhart, 2000. "Mirage of Floating Exchange Rates," American Economic Review, American Economic Association, vol. 90(2), pages 65-70, May.
  11. Ronald I. McKinnon & Huw Pill, 1996. "Credible Liberalizations and International Capital Flows: The "Overborrowing Syndrome"," NBER Chapters, in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 7-50 National Bureau of Economic Research, Inc.
  12. Kawai, Masahiro & Akiyama, Shigeru, 2000. "Implications of the currency crisis for exchange rate arrangements in emerging East Asia," Policy Research Working Paper Series 2502, The World Bank.
  13. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
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