Synchronized Business Cycles in East Asia and Fluctuations in the Yen/Dollar Exchange Rate
Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 02/2003
The World Economy, Volume 26, Issue 8, Page 1067-1088, Aug 2003
23 Pages Posted: 4 Sep 2007 Last revised: 1 Aug 2022
Date Written: January 1, 2003
Abstract
This working paper was written by Ronald McKinnon (Stanford University) and Gunther Schnabl (Tübingen University).
Because many authors have proposed stimulating the ailing Japanese economy by monetary expansion and yen depreciation, we explore the repercussions of depreciating the yen against the dollar on the other East Asian economies - which largely peg to the dollar. Since 1980, economic integration among Japan's neighbors - China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, and Thailand - has intensified and (except for China) their business cycles have been highly synchronized. These cycles have been closely linked to fluctuations in the yen/dollar exchange rate - through changes in their export competitiveness and inflows of foreign direct investment. We show that a major yen devaluation would have a negative impact on incomes in other East Asian economies and that it is not a sensible policy option for Japan.
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