The East Asian Dollar Standard, Fear of Floating, and Original Sin

Before the crisis of 1997/98, the East Asian economies—except for Japan but including China—pegged their currencies to the US dollar. To avoid further turmoil, the IMF argues that these currencies should float more freely. However, the authors’ econometric estimations show that the dollar's predominant weight in East Asian currency baskets has returned to its pre‐crisis levels. By 2002, the day‐to‐day volatility of each country's exchange rate against the dollar had again become negligible. Most governments were rapidly accumulating a “war chest” of official dollar reserves, which portends that this exchange rate stabilization will come to extend over months or quarters. From the doctrine of “original sin” applied to emerging‐market economies, the authors argue that this fear of floating is entirely rational from the perspective of each individual country. And their joint pegging to the dollar benefits the East Asian dollar bloc as a whole, although Japan remains an important outlier.     

The 1997 Asian Currency Crisis,Financial Linkages,and the Monetary Policy of Japan

The evidence is examined that excessively liberal monetary policy by the Bank of Japan, before and after the financial collapse of Japan in 1992, may have led other East Asian economies into “over‐borrowing” and speculative investments, prior to the currency crisis in 1997–98. The authors test for cointegration and Granger causality between Japanese money supply M1 and the domestic investment of eight East Asian economies and Australia. US and German money supplies are also used as a benchmark. There is strong evidence that there are long‐ and short‐run causal relationships between the Japanese money supply and the domestic investment of the Asian crisis‐inflicted economies prior to 1997.     

Indonesia After the Asian Crisis*

Indonesia was deeply affected by the 1997–1998 crisis, more so than its East Asian neighbors. Its economic contraction was deeper and more prolonged. It was the only one to experience a (temporary) loss of macroeconomic control. It also suffered “twin crises,” in the sense that its serious economic and financial problems were accompanied by regime collapse. Consequently, recovery was a slow and complex process, as new institutions had to be created, and old ones reformed under successive short‐lived administrations. But this process is largely over. The directly elected president with a strong popular mandate is in power. The new institutional framework for economic policy‐making is in place. Macroeconomic stability has been restored. Although growth has yet to return to pre‐crisis levels, by 2004 per capita income and poverty incidence had recovered to levels prevailing in the mid‐1990s, and in the circumstances economic recovery has arguably proceeded about as quickly as could reasonably have been expected.     

Asian Currency Crisis and the International Monetary Fund, 10 Years Later: Overview*

This paper is an overview of the Asian currency crisis in Thailand, Indonesia, and South Korea in 1997–1998, with an emphasis on the role of the International Monetary Fund (IMF). It provides a detailed account of the development of the crisis and analyses and evaluates the content of IMF advice and its consequences. The size of the IMF package for each of these three countries is judged to have been too small. This paper also has a comparative perspective; the Mexican crisis is reviewed as a precursor to the Asian crisis to see what the IMF learned, and how it prepared, for future crises. The causes of the crises and IMF conditionality for the post‐Asian crisis countries, Russia, Brazil, Turkey, and Argentina, are also compared to the Asian crisis countries. By agreeing to maintain a fixed exchange rate, for example, the IMF is judged to have been “softer” in its approach to the post‐Asian crisis countries.     

Post-Crisis Experiments in Development Finance Architectures: A Hirschmanian Perspective On ‘Productive Incoherence’

Abstract

The Asian and especially the global crisis of 2008 have catalyzed decentralization of the developing world’s financial governance architecture. I understand this state of affairs via the concept of “productive incoherence” which is apparent in a denser, multilayered development financial architecture that is emerging as a consequence of heterogeneous practical adjustments to changing circumstances rather than as the embodiment of a coherent doctrine. Drawing on Albert Hirschman, I argue that the absence of an encompassing theoretical blueprint for a new economic system—i.e. a new “ism” to replace neoliberalism—is in fact a vitally important virtue. If we cannot live without a new “ism,” I propose “Hirschmanian Possibilism” as a new doctrine—one that rejects an overarching theoretical framework from which to deduce the singly appropriate institutional structure of the economy. Hirschmanian Possibilism asserts instead the value of productive incoherence as a framework for pursuing democratic, ethically viable development institutions.     

Joining Global Production Networks: Experience and Prospects of India

Cross‐border dispersion of different stages/slices of the production processes within vertically integrated global industries (“global production sharing”) has been a key structural change in the global economy in recent decades. This paper examines India's experience with exploiting opportunities created by this phenomenon for export expansion from a comparative East Asian perspective. The analysis reveals that India has so far failed fitting into global production networks in electronics and electrical goods, which have been the prime movers of export dynamism in China and the other high‐performing East Asian countries. The findings of this study provide further support to the case for completing the unfinished reform agenda, encompassing both trade and investment policy reforms, and “behind‐the‐border” reforms. There is also a strong case, based on the experiences in East Asia and elsewhere, for combining further reforms with a proactive investment promotion campaign to attract multinational enterprises engaged in global production networks.     

Chiang Mai Initiative Multilateralization: Origin,Development, and Outlook

This paper discusses the Chiang Mai Initiative Multilateralization (CMIM) – its origin, development, and outlook. The experiences of the 1997–1998 East Asian financial crisis that led to the creation of the Chiang Mai Initiative (CMI), the evolution of the Chiang Mai Initiative to become the CMIM, and the setting up of the ASEAN+3 Macroeconomic Research Office (AMRO) to support CMIM are reviewed. Proposals are made on how to make the liquidity support role of the CMIM more effective. These involve changing the International Monetary Fund link from that based on using more than a certain percentage of a country's CMIM quota to that based on the number of times the 90‐day CMIM swap needs to be rolled over, supplementing the size of the CMIM through linked bilateral swaps, allowing “contributing partners” beyond the current CMIM members, and developing the effectiveness of AMRO and its evolution into an East Asian monetary organization.     

US Credit Crisis and Spillovers to Asia

We review key highlights of the global credit crisis. We then consider how financial turmoil in the largest advanced economies might be transmitted to East Asia. The focus is on foreign trade links, international capital flows, currency market pressures and mismatches, financial sector fragilities, and countercyclical monetary and fiscal policy actions. We introduce a set of vulnerability indicators and explore whether an ordinal ranking of East Asian economies according to these vulnerability indicators seems to be related to the cross-country differences in estimated slowdowns of economic growth during the crisis. Finally, we discuss how Asian economies might encourage the adoption of a stronger regulatory and supervisory framework in the USA and whether some Asian economies and the USA might pursue a more “balanced” growth strategy after the crisis.     

Real and Financial Integration in East Asia

This paper examines the real and financial integration of East Asian economies, by comparing the degree of real vs financial and global vs regional integration, before vs after the Asian crisis. First, price and quantity measures such as the size of intra‐ and inter‐regional trade, cross‐border financial assets, stock return correlation, and interest rate differentials are investigated. Second, the structural panel vector autoregression (VAR) model is constructed to analyze macroeconomic consequences of real and financial integration such as cross‐country output and consumption relation. The results suggest that (i) the degree of real integration significantly increased after the crisis, both regionally and globally; (iii) quantity and price measures showed an increased financial integration after the crisis, but the consumption relation did not; (iv) the degree of regional financial integration is smaller than that of global financial integration, based on the consumption relation; and (v) financial integration lags real integration, especially for regional integration.     

Is neo-Walrasian macroeconom(etr)ics a dead end? An assessment of recent criticisms of DSGE models

After the 2008 “new Great Crisis,” it is widely recognized that mainstream macroeconom(etr)ics—the last result of Lucas’s anti-Keynesian revolution of the 1980s, which tried to give macroeconomics sound neo‐Walrasian microeconomic bases —has failed to anticipate and then appraise the crisis. Has this crisis revealed a failure of this macroeconom(etr)ics as a scientific theory? Mainstream macroeconomists defend their models on the basis of their alleged superiority in terms of clarity and coherence. The thesis of this article is that this claim about superiority is false. The study argues that the reasons for the failure of mainstream macroeconom(etr)ics—in particular its poor predictive performance and interpretative weakness—reside in the implications of the neo-Walrasian legacy and the problems connected with the implementation of that program.     

Asset Bubbles, Leverage and 'Lifeboats': Elements of the East Asian Crisis

Collapsing credit markets have been blamed for the depth and persistence of the Great Depression in the United States. Could similar mechanisms have played a role in ending the East Asian economic miracle – and in creating fragility in global financial markets? After a brief account of the nature of the East Asian crises of 1997/8, we use the framework of highly-leveraged, fully-collaterised firms due to Kiyotaki and Moore (1997) to explore the impact of a credit crunch. The paper emphasises the fragility of equilibrium and how rapidly boom can turn to bust.     

An analysis of East Asian currency area: Bayesian dynamic factor model approach

There has recently been an increasing interest in the establishment of a common currency area in East Asia in the aftermath of the East Asian financial crisis. In this article I examine the desirability and feasibility of forming a currency area in the region by checking the symmetry of shocks as an important criterion of the theory of Optimum Currency Area. I employ a dynamic factor model to decompose aggregate output into world, regional and country‐specific components and estimate the model using a Gibbs sampling simulation. Persistent properties of those components are examined and variance decomposition analysis is performed to investigate the role of each component in output variance. The European Monetary Union, with the successful launch of the euro, is the natural benchmark for comparison. Based on variance analysis, it is found that East Asian countries, on average, are less plausible candidates for a currency area than European counterparts. However, a subgroup of countries in East Asia is as qualified as those in Europe. Given the ongoing integration in East Asia, it is not premature to prepare for such a currency area in this region.     

Evidence on the Convergence of Per Capita Income: A Comparison of Founder Members of the Association of South East Asian Nations and the South Asian Association of Regional Cooperation

This paper investigates the per capita income convergence patterns of a set of Association of South East Asian Nations (ASEAN) and South Asian Association of Regional Cooperation (SAARC) countries. We obtained a time‐series analysis for stochastic convergence by applying unit‐root tests in the presence of two endogenously‐determined structural breaks. We then supplemented the results by tests that produced evidence for β convergence. The evidence shows that the relative per capita income series of ASEAN‐5 countries were consistent with stochastic convergence and β convergence, but this was not found for SAARC‐5 countries. For the ASEAN‐5 countries, the structural breaks associated with the world oil crisis and the Asian crisis impacted heavily on the convergence/divergence process.     

The Procyclical Role of Rating Agencies: Evidence from the East Asian Crisis

We demonstrate that credit rating agencies aggravated the East Asian crisis. In fact, having failed to predict the emergence of the crisis, rating agencies became excessively conservative. They downgraded East Asian crisis countries more than the worsening in these countries' economic fundamentals would justify. This unduly exacerbated, for these countries, the cost of borrowing abroad and caused the supply of international capital to them to evaporate. In turn, lower than deserved ratings contributed – at least for some time – to amplify the East Asian crisis. Although this goes beyond the scope of our paper, we also propose an endogenous rationale for rating agencies to become excessively conservative after having made blatant errors in predicting the East Asian crisis. Specifically, rating agencies would have an incentive to become more conservative, so as to recover from the damage these errors caused to them and to rebuild their own reputation.     

The persistence in real exchange rate: Evidence from East Asian countries

In this article, we examine the degree of persistence in monthly real exchange rate of six East Asian countries in relation to their two major trading partners, the United States and Japan, to study the validity of PPP for the 1976:01–2009:03 period. To investigate the persistency in real exchange rate series, we use sum of the autoregressive (AR) coefficients and the confidence interval for it using grid-bootstrap procedure recently developed by Hansen (1999). We have two findings: first, we find evidence for high persistency in real exchange rate in terms of the Japanese yen for five countries and for four countries in terms of the US dollar the for the full and pre-crisis sample periods. Second, for the post-crisis period, the presence of low persistency in real exchange rate supports PPP for three countries in terms of the Japanese yen and five countries in terms of the US dollar. These findings indicate that real exchange rate series of five East Asian countries are mean-revert based on their exchange rate policies and East Asian countries can form a currency union.     

Hoarding of international reserves: It's a neighbourly day in Asia

To explain why Asian countries seem to have been hoarding international reserves, especially since the 1997 crisis, we consider various regional neighbourhood effects. One such effect is that of “catching up with the Joneses”. We revisit that effect by analysing several refinements of it. We also consider the fear of the kind of contagion that the crisis‐hit countries saw in 1997. Finally, we look at the possibility of a regional financial cycle, in which the conditions that led to the crisis might have been correlated across countries. We find that refining the Joneses effect to take account of trade links strengthens its power to explain the build‐up of reserves. We also observe that a country that finds itself more vulnerable than its regional neighbours would tend to accumulate more reserves. Finally, we find that a common regional factor related to current‐account balances spurs further reserve accumulation. Contrary to previous analyses, our results suggest that only a couple of Asian countries have been holding excessive reserves. Some were actually holding less reserves than would be optimal in the presence of neighbourhood effects.     

中国“两大奇迹”形成逻辑的政治经济学阐释*

在党的百年奋斗历程中，创造了大规模、快速的经济增长，形成了社会领域长期稳定发展的“两大奇迹”。“两大奇迹”的形成原因是：坚持党的领导是创造“两大奇迹”的政治保证；坚持科学理论指导是“两大奇迹”创造的思想保证；社会主义制度和国家治理体系是“两大奇迹”创造的制度保证；党领导下人民创造力的发挥是“两大奇迹”创造的动力保证。从政治经济学的理论逻辑来看，“两大奇迹”形成的理论逻辑是党领导下的国家能力与规模化市场创造的结合造就了经济增长的奇迹，在经济快速增长所奠定的经济基础上形成了社会长期稳定的奇迹。“两大奇迹”历史经验是党领导下国家能力的培育，中央政府与地方政府的协同互补，发展规划与市场机制的结合，选择性产业政策、功能性产业政策与普惠性产业政策的协调。在第二个百年续写“两个奇迹”，并创造高质量发展奇迹需要从中长期发展视角判断未来发展的趋势，继续推动国家与市场的共同演进，重塑高质量发展的增长体系，充分释放内需潜力，确立“以人为本”的经济发展模式。     

Dynamic Analysis of the Exchange Rate Regime: Policy Implications for Emerging Countries in East Asia

This paper discusses exchange rate policies in East Asia. In particular, we explore whether actual policies that have been implemented by East Asian countries after the Asian Financial Crisis follow or deviate from theoretically “desirable” policies over the medium and long terms. On theoretical analysis, we show the relative superiority of a basket‐peg regime with the basket weight rule when compared with a floating regime implementing the interest rate rule or money supply rule. For countries that currently adopt a fixed exchange rate regime, they would be better off shifting toward either a basket‐peg or a floating regime over the medium term. A shift to a basket peg is more preferred when compared with a shift to a floating regime when the exchange rate fluctuations are large.     

Government Guarantees, Investment, and Vulnerability to Financial Crises

The paper presents a new model of the East Asian crisis which combines three elements—moral hazard, investment collapse, and multiple equilibria—in a single account. The study locates the causes of the crisis in poor financial regulation, highly leveraged financial institutions, and implicit guarantees to the financial sector. The model has a unique long‐run equilibrium with overinvestment. But in the short run, in which the capital stock is fixed, there may be multiple equilibria. In a crisis the government is forced to renege on its guarantees; the effect is a rapid reversal of foreign capital flows.     

Dynamic linkages between exchange rates and stock prices: Evidence from East Asian markets

This study examines dynamic linkages between exchange rates and stock prices for seven East Asian countries, including Hong Kong, Japan, Korea, Malaysia, Singapore, Taiwan, and Thailand, for the period January 1988 to October 1998. Our empirical results show a significant causal relation from exchange rates to stock prices for Hong Kong, Japan, Malaysia, and Thailand before the 1997 Asian financial crisis. We also find a causal relation from the equity market to the foreign exchange market for Hong Kong, Korea, and Singapore. Further, while no country shows a significant causality from stock prices to exchange rates during the Asian crisis, a causal relation from exchange rates to stock prices is found for all countries except Malaysia. Our findings are robust with respect to various testing methods used, including Granger causality tests, a variance decomposition analysis, and an impulse response analysis. Our findings also indicate that the linkages vary across economies with respect to exchange rate regimes, the trade size, the degree of capital control, and the size of equity market.