Implications of the Currency Crisis for Exchange Rate Arrangements in Emerging East Asia
The authors examine the implications of the East Asian currency crisis for exchange rate arrangements in the region's emerging market economies. They focus on the roles of the U.S. dollar, the Japanese yen, and the euro in the emerging East Asian economies' exchange rate policies. They claim that these economies are particularly susceptible to large exchange rate fluctuations because they have been pursuing financial deregulation, opening markets, and liberalizing capital accounts, and because they face increased risk of sudden capital flow reversals, with attendant instability in their financial system and foreign exchange market. The authors find that the dollar's role as the dominant anchor currency in East Asia was reduced during the recent currency crisis but has become prominent again since late 1998. It is too early for conclusions, but the economies seem likely to maintain more flexible exchange rate arrangements, at least officially. At the same time, these economies presumably will continue to prefer to maintain exchange rate stability without fixed rate commitments. They are better off choosing a balanced currency basket system in which the yen and the euro play a more important role than before. The ASEAN countries have a special incentive to avoid harmful fluctuations in exchange rates within the region, which could suddenly alter their international price competitiveness and make prospective free trade agreements unsuitable. So they may stabilize their exchange rates against similar currency baskets, to ensure intraregional exchange rate stability.
| Summary: | The authors examine the implications of
the East Asian currency crisis for exchange rate
arrangements in the region's emerging market economies.
They focus on the roles of the U.S. dollar, the Japanese
yen, and the euro in the emerging East Asian economies'
exchange rate policies. They claim that these economies are
particularly susceptible to large exchange rate fluctuations
because they have been pursuing financial deregulation,
opening markets, and liberalizing capital accounts, and
because they face increased risk of sudden capital flow
reversals, with attendant instability in their financial
system and foreign exchange market. The authors find that
the dollar's role as the dominant anchor currency in
East Asia was reduced during the recent currency crisis but
has become prominent again since late 1998. It is too early
for conclusions, but the economies seem likely to maintain
more flexible exchange rate arrangements, at least
officially. At the same time, these economies presumably
will continue to prefer to maintain exchange rate stability
without fixed rate commitments. They are better off choosing
a balanced currency basket system in which the yen and the
euro play a more important role than before. The ASEAN
countries have a special incentive to avoid harmful
fluctuations in exchange rates within the region, which
could suddenly alter their international price
competitiveness and make prospective free trade agreements
unsuitable. So they may stabilize their exchange rates
against similar currency baskets, to ensure intraregional
exchange rate stability. |
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