Exchange Rate Management and Trade Balance in Selected East Asian Countries

Abstract

Exchange rate management has become a hot topic in academic circles examining the merits of fixed versus floating regimes. The 1997-98 Asian crisis has refocused attention on the exchange rate management of East Asian countries. Most views expressed are critical of the pre-crisis US dollar peg regime, citing it as one cause of the crisis.This article evaluates the pre-crisis US dollar peg regime in the selected East Asian countries by examining its negative effect on trade balance through currency appreciation. The main findings of the study are as follows: First, a significantly large appreciation of real effective exchange rates was found in the selected East Asian countries under the precrisis US dollar peg regime. Second, a regression analysis verified the correlation between real effective exchange rates and trade balances. Third, a simulation analysis showed that the appreciation of real effective exchange rates had a clearly negative effect on trade balances. The strategic implication of our findings is how important the stabilizing of the real effective exchange rate is in exchange rate management.