Monetary and Economic Studies Vol.20, No. S-1 / December 2002

Exchange Rate Arrangements in East Asia: Lessons from the 1997-98 Currency Crisis

Masahiro Kawai

This paper examines the evolution of exchange rate arrangements in East Asia's emerging market economies over the last 10 years. It considers both "official" and "observed" exchange rate arrangements in these economies from an international comparative perspective. By focusing on the roles of the dollar, the yen, and the euro as anchor currencies for exchange rate stabilization, the paper claims that the dollar played a dominant role as a de jure or de facto anchor for emerging East Asia until the 1997-98 currency crisis. During the crisis, the dollar's dominance naturally declined in affected East Asia as a result of a general shift to more flexible exchange rate arrangements. In the post-crisis period, the dollar has regained prominence in some countries (notably in Malaysia), while its dominance has been reduced and exchange rate flexibility has risen in others (notably in Indonesia). Interesting is the observation that Korea and Thailand appear to have shifted to a de facto currency basket arrangement with significant weights on the dollar and the yen, similar to Singapore's managed floating arrangement. This paper also considers what may be a desirable currency system for the region. Given the high volatility of yen/dollar exchange rates and partner diversity of trade and foreign direct investment (FDI) relationships, it claims that the emerging East Asian economies would be better off stabilizing their currencies to a balanced currency basket in which the dollar, the yen, and the euro play equally important roles. For intra-regional exchange rate stability, greater coordination on the currency basket policy would be desirable, and this needs to be supported by regional policy dialogue and financing mechanisms.

Keywords: East Asian currency crisis; Exchange rate arrangements; Two-corner solution approach; Fear of floating; Currency basket system

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2002 Bank of Japan All Rights Reserved.

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