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

  • Ronald McKinnon

    (Stanford University)

  • Gunther Schnabl

    (Tuebingen University)

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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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
Contact details of provider: Web page: http://econwpa.repec.org

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  2. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
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