ABSTRACT
TheAsian currency crisis of 1997-98 has taught many lessons to both scholars and policy makers around the world. One of these lessons concerns the exchange rate regime. East Asian countries chose to fix their currencies to the US dollar, whether explicitly as in Hong Kong’s case, or implicitly as in Thailand’s. Because East Asian countries have strong trade and investment ties with many other countries, including Japan, European countries, and the United States as well as their own neighboring countries, thede factodollar pegwas clearly inappropriate even before the Asian currency crisis. The dollar peg was inextricably tied to a boom-and-bust cycle, as the dollar was at times undervalued and at times overvalued against the yen and European currencies. The export boom and domestic over-investment of 1994-95 was followed by a bust in 1996-97, and this was one of the reasons Thailand fell into difficulties; capital inflows dried up and there was an attack on the baht. After the currency crisis, many Asian countries realized the problems that plagued the dollar peg and did not return to it. Once the worst of the crisis was over, many East Asian countries adopted a managed floating exchange rate regime, with the notable exceptions of Hong Kong, China, and Malaysia. Hong Kong has kept its dollar peg regime under a currency board system, and China has maintained a de facto dollar peg. Malaysia officially reverted back to the dollar peg system in September 1998, after using a floating exchange rate regime for a little more than a year.
