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

Ronald McKinnon and Gunther Schnabl ()
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Ronald McKinnon: Stanford University

International Finance from EconWPA

Abstract: 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.

Keywords: Exchange Rates; Business Cycles; East Asian Dollar Standard; Original Sin; Conflicted Virtue (search for similar items in EconPapers)
JEL-codes: F31 F32 F33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn and nep-sea
Date: 2004-06-30, Revised 2004-07-07
Note: Type of Document - pdf; pages: 38
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Journal Article: The Return to Soft Dollar Pegging in East Asia: Mitigating Conflicted Virtue (2004)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpif:0406007

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