The East Asian Dollar Standard, Life after Death?
Stanford King Center on Global Development Working Paper
By keying on the US dollar, before 1997 the macroeconomic policies of the five East Asian crisis economies (Indonesia, Korea, Malaysia, Philippines, and Thailand) were (loosely) tied to each other. Their dollar exchange rates had been fairly stable for more than a decade, and, by the purchasing power parity criterion, were more or less correctly aligned with each other and with the American price level. This paper argues that overborrowing in the pre-1997 regime by these economies was primarily a regulatory problem, compounded by unnatural interest disparities. It was not due to exchange rate mismanagement per se. Appropriate domestic financial reforms would permit the East Asian five to restore a dollar-based exchange rate regime that would protect them from competitive devaluations. The advantages to them, and to the region, would be enhanced if Japan and the United States succeed in stabilizing the yen/dollar ratio, which would help, as well, to end deflation in Japan.