After the Crisis, the East Asian Dollar Standard Resurrected: An Interpretation of High Frequency Exchange Rate Pegging

Abstract

For more than a decade before the great crisis of 1997-98, East Asian countries pegged softly to the U.S. dollar. In the period of currency chaos from mid 1997 through 1998 with exchange depreciations in eight East Asian countries, massive deflationary pressure in dollar terms which was unleashed in the whole East Asian region. Surprisingly, however, the post-crisis exchange rate regime in 1999 into 2000 again exhibits high frequency pegging to the dollar much like the pre-crisis regime. In 1999-2000, there was (is) a honeymoon effect where short-term rates of interest in the crisis economies remained unusually low so that hot money flows were temporarily muted. But this honeymoon will end as the crisis recedes in time. Finally, I explore how the informal rules of the game under which the East Asian dollar standard operates might be improved to (1) lengthen the term structure of finance-including exchange rate obligations-to make the system more resilient, and (2) tighten bank regulation so as to reduce moral hazard in international capital flows.