Experiences of Asian Countries with Various Exchange Rate Policies

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This paper considers the experience of eight Asian countries (India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand)1 with various exchange rate policies, during the period following the generalised floating of the major currencies in 1973. During the last decade considerable theoretical and empirical research has been done in the area of price and exchange rate stability and the effectiveness of macroeconomic policy under a floating system.2 Most of this research, however, has been in the context of the industrial countries and relatively little had been done to adapt it to the case of developing countries.3 The purpose of this paper is to analyse the impact of the exchange rate and monetary policies of various Asian countries on their domestic inflation rates and balance of payments positions. As a first step, the actual experience of these countries as regards the movements of their domestic prices, foreign prices and exchange rates are examined. Next, the causal relationships determining domestic inflation and the balance of payments are specified and subjected to empirical verification. Domestic inflation is specified as a function of domestic monetary expansion and the imported inflation, while the balance of payments is specified as a function of the rate of credit expansion and the relative price of traded and non-traded goods. Finally, some general conclusions regarding the appropriate exchange rate policies for the Asian countries are made.