A Post-Keynesian Approach
- New Directions in Modern Economics series
Edited by Claude Gnos, Louis-Philippe Rochon and Domenica Tropeano
Chapter 8: Exchange Rate Policy in Developing Countries: The East Asian Experience
8. Exchange rate policy in developing countries: the East Asian experience Mohamed Aslam INTRODUCTION Since the 1970s, currency has became a ‘commodity’ and is heavily traded in the foreign exchange market. The movement of value of a currency vis-à-vis other national currencies is becoming more volatile and it frequently distorts macroeconomic stability, mainly in the case of developing countries. The exchange rate is determined in the international currency market rather than supply and demand in the international goods market. The movement of the exchange rate is substantially affected by non-fundamental factors. The expansion of foreign portfolio capital flow is one of the prime factors causing (wild) movement or creating volatility in the exchange rate. The rapid development and expansion of the international capital markets including derivatives and the integration of capital markets at the regional or international level have produced dramatic exchange rate volatility. It is widely accepted that trading and speculation in currency and derivative markets and international portfolio investments are the main causes of exchange rate volatility. For many developing countries, the exchange rate is one of the measures for maintaining or increasing export competitiveness. The export sector largely contributes to economic growth, employment and macroeconomic stability. Globalization of the financial market has created a dilemma particularly for the developing countries in safeguarding the state of their macroeconomy. Opening up capital accounts and liberalization of the domestic capital market to external influences has actually exacerbated the current account of balance of payments rather than bringing a real...
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