Does a formal common-basket peg in East Asia make economic sense?

Abstract

Before the financial crisis, a number of East Asian economies managed their exchange rates with the aim of stabilising the value of their currency against a basket of key currencies, but overwhelmingly the US dollar (Frankel and Wei 1994). The arrangement suited these economies in the first half of the 1990s as the yen appreciated against the dollar, diverting trade and investment their way and stimulating economic growth. But as the dollar appreciated against the yen from 1995, East Asian countries lost competitiveness against Japan and Europe, and their trading positions deteriorated, leaving them vulnerable to changes in investor sentiment.

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