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August 2000
For more than a decade before the great crisis of 1997-98, East Asian countries pegged to the U.S. dollar. With the important exception of Japan, what became the crisis economies of Indonesia, Korea, Malaysia, Philippines, and Thailand as well as the non-crisis economies of Hong Kong, Singapore, China, and Taiwan, organized their domestic monetary policies to keep their dollar exchange rates remarkably stable. They behaved as if they were using their mutual link to the dollar as the nominal anchor for their domestic price levels-what I called "the East Asian dollar standard" (McKinnon 2000).
What happened to the East Asian dollar standard (EADS) during the great crisis is analyzed first. In the period of currency chaos from mid 1997 through 1998 with devaluations and wild exchange rate fluctuations, how did the dollar fare as nominal anchor? The collective importance of EADS as a regional monetary anchor beyond that provided by the United States alone was revealed by the massive deflationary pressure in dollar terms which was unleashed in the whole East Asian region by the devaluations in eight East Asian countries. Second, I show how the post-crisis exchange rate regime in 1999 into 2000 exhibits high frequency pegging to the dollar much like the pre-crisis regime. Third, I explore the post-crisis "honey moon" effect where hot money flows are temporarily muted, but likely to return. Finally, the informal "rules of the game" under which EADS operates, and how these might be improved to give the dollar standard greater resilience through lengthening the term structure of finance are explored.