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

HKIMR Working Paper No. 11/2003

35 Pages Posted: 27 Aug 2007  

Ronald McKinnon

Stanford University, School of Humanities & Sciences, Department of Economics (Deceased); CESifo (Center for Economic Studies and Ifo Institute for Economic Research) (Deceased)

Gunther Schnabl

University of Leipzig - Institute for Economic Policy

Multiple version iconThere are 2 versions of this paper

Date Written: June 2003

Abstract

Before the crisis of 1997-98, the East Asian economies — except for Japan but including China — pegged their currencies to the U.S. dollar. To avoid further turmoil, the IMF now argues that these currencies should float more freely. However, our 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 has again become negligible. In addition, most governments are 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, we argue that this fear of floating is entirely rational from the perspective of each individual country. And, although Japan remains an important outlier, their joint pegging to the dollar benefits the East Asian dollar bloc as a whole.

Suggested Citation

McKinnon, Ronald and Schnabl, Gunther, The East Asian Dollar Standard, Fear of Floating, and Original Sin (June 2003). HKIMR Working Paper No. 11/2003. Available at SSRN: https://ssrn.com/abstract=1009158 or http://dx.doi.org/10.2139/ssrn.1009158

Ronald McKinnon (Contact Author)

Stanford University, School of Humanities & Sciences, Department of Economics (Deceased)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) (Deceased)

Gunther Schnabl

University of Leipzig - Institute for Economic Policy ( email )

Institute for Economic Policy
Grimmaische Straße 12
Leipzig, 04109
Germany

HOME PAGE: http://www.wifa.uni-leipzig.de/iwp/

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