Chapter 14: Currency Baskets for East Asia
Eiji Ogawa 14.1 INTRODUCTION Nearly 15 years have passed since the Asian currency crisis occurred in 1997. During that time we have been discussing desirable exchange rates systems for East Asian countries. It is recognized that the currency crisis was caused by the dollar peg system that East Asian monetary authorities officially or de facto adopted before the Asian currency crisis. A more flexible exchange rate system such as a currency basket system should be desirable for East Asian countries that have strong economic relationships with not only the United States but also European countries and neighbouring East Asian countries, which includes Japan. Immediately after the Asian currency crisis, many East Asian countries tried to shift from an official or de facto dollar peg system to more flexible exchange rate regimes, which include managed floating exchange rate systems. On the other hand, the monetary authority of Malaysia officially returned to the dollar peg system in September 1998. Moreover, the People’s Bank of China maintained the dollar peg it adopted in 1994 even after the Asian currency crisis because the Chinese economy faced no currency crisis thanks to its own strict capital and foreign exchange controls. Both the monetary authorities of China and Malaysia, however, made announcements of changing their exchange rate system to a managed floating exchange rate system with reference to a currency basket on 21 July 2005. These currency baskets include major international currencies with strong economic relations to their economies in terms of international trade, foreign direct...
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