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Capital markets and exchange rate stabilization in East Asia: Diversifying risk based on currency baskets

  • Schnabl, Gunther

Before and after the Asian crisis, the dollar has been the dominant anchor and reserve currency in East Asia. Due to underdeveloped capital markets and a very limited international role of the domestic currencies, the East Asian countries (except Japan) are likely to continue exchange rate stabilization and accumulation of international reserves. Yet expectations about a further depreciation of the dollar may trigger a broader orientation of exchange rate policies based on basket strategies. While the direction of trade suggests a substantial weight for the Japanese yen in East Asian countries' currency baskets, the role of the euro is enhanced by expectations about its long-term stability. (Rolling) econometric estimations of the basket structures in East Asia suggest growing weights of the euro and the yen in the currency baskets of Indonesia, Korea, Philippines, Singapore, Taiwan and Thailand. In contrast, for China, Hong Kong and Malaysia, the dollar remains the dominant anchor currency.

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Paper provided by Hamburg Institute of International Economics (HWWI) in its series HWWI Research Papers with number 2-1.

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Date of creation: 2006
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Handle: RePEc:zbw:hwwirp:2-1
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  1. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
  2. Chinn, Menzie & Frankel, Jeffrey, 2005. "Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?," Working Paper Series rwp05-064, Harvard University, John F. Kennedy School of Government.
  3. Jeffrey Frankel & Andrew Rose, 2002. "An Estimate Of The Effect Of Common Currencies On Trade And Income," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 437-466, May.
  4. Ronald McKinnon & Gunther Schnabl, 2003. "Synchronized Business Cycles in East Asia and Fluctuations in the Yen/Dollar Exchange Rate," Working Papers 022003, Hong Kong Institute for Monetary Research.
  5. 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.
  6. Gunther Schnabl, 2005. "The Russian Currency Basket: The Rising Role of the Euro for Russia’s Exchange Rate Policies," International Finance 0512005, EconWPA.
  7. Chmelarova, Viera & Schnabl, Gunther, 2006. "Exchange rate stabilization in developed and underdeveloped capital markets," Working Paper Series 0636, European Central Bank.
  8. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The Revived Bretton Woods System: The Effects of Periphery Intervention and Reserve Management on Interest Rates & Exchange Rates in Center Countries," NBER Working Papers 10332, National Bureau of Economic Research, Inc.
  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, 08.
  10. Andrew D. Crockett & Morris Goldstein, 1976. "Inflation under Fixed and Flexible Exchange Rates (L'inflation en régime de taux de change fixes et en régime de taux de change flexibles) (Inflación con tipos de cambio fijos y flexibles)," IMF Staff Papers, Palgrave Macmillan, vol. 23(3), pages 509-544, November.
  11. Ulrich Volz, 2009. "Three Cases for Monetary Integration in East Asia," Chapters, in: Towards Monetary and Financial Integration in East Asia, chapter 8 Edward Elgar.
  12. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
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