Exchange Rates Under the East Asian Dollar Standard ― Living With Conflicted Virtue

The increasingly integrated economies of East Asia -- China, Hong Kong, Indonesia,Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan, and Thailand -- face the dilemma of howto achieve exchange-rate security in the absence of a unifying "Asian euro." The US dollar hasbecome the region's dominant intraregional trading currency as well as the monetary anchor to whichEast Asian economies informally peg their currencies. In this timely and original analysis of thebenefits and risks of an East Asian dollar standard, Ronald McKinnon takes issue with theconventional view that urges flexible exchange rates on financially fragile economies. He arguesinstead that East Asian countries should coordinate their policies to keep their exchange ratesstable against the dollar.McKinnon develops a conceptual framework to show where the conventionalwisdom on exchange rates has gone wrong. Pressure on the "virtuous" high-saving dollar-creditor EastAsian nations to appreciate their currencies leads to a "conflicted" choice between a possibledeflationary slump if they do appreciate and threatened trade sanctions if they do not. Analyzinginteractions among the East Asian economies, McKinnon explains the rationale, and the need, forgreater exchange-rate security in the region, pointing to the soft-dollar pegs adopted by thesenations as steps in the right direction. He suggests that the dollar standard in East Asia could berationalized through collective action by national governments and considers the effect of Americanmonetary and trade policies on the East Asian economy.