ABSTRACT
A common argument for pegging the exchange rate is that linking to a stable foreign currency enforces discipline on domestic monetary and fiscal policy which in turn stabilizes inflation expectations. To varying degrees, East Asian economies have pegged their currencies to the US dollar. This chapter describes the nature of the exchange rate regimes in selected East Asian economies. Among the major shocks to East Asian economies in the last decade was the strong depreciation of the US dollar against major currencies beginning in 1985 and the lowering of US interest rates between 1989 and 1993. The chapter discusses the complications of monetary management in East Asian countries when they have attempted to limit adjustment of their exchange rates. It also discusses how for most countries pegging has not worked as a mechanism to dampen inflation. The chapter explains how the low inflation achieved by East Asian countries can be attributed to other factors.
