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

38 Pages Posted: 5 Jul 2005  

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

Date Written: July 2004

Abstract

Before the 1997-1998 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 deflationary 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.

Keywords: Exchange rates, business cycles, East Asian dollar standard

JEL Classification: F3, F31, F32, F33

Suggested Citation

McKinnon, Ronald and Schnabl, Gunther, The Return to Soft Dollar Pegging in East Asia: Mitigating Conflicted Virtue (July 2004). International Finance, Vol. 7, No. 2, pp. 169-201. Available at SSRN: https://ssrn.com/abstract=753367

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 (Contact Author)

University of Leipzig - Institute for Economic Policy ( email )

Institute for Economic Policy
Grimmaische Stra├če 12
Leipzig, 04109
Germany

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

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