Bretton Woods II and the East Asian Emerging Economies: Lazarus, Phoenix, or Humpty Dumpty?

Several studies have commented on the emergence of a new international monetary system in the post-Asian crisis years. The recent international financial crisis has, however, put Bretton Woods II (or BW II) under considerable strain. This paper analyzes the sustainability of the pre-crisis order from an East Asian emerging country perspective. A simple framework incorporating real and financial sectors is constructed in order to explore possible consequences of the shocks and policy choices that these economies currently face. Stock and flow implications are analyzed. Assuming that recent events would have reinforced monetary authorities' desire to maintain an adequate cushion of reserves while preventing exchange rate volatility, we find that low international interest rates enhance the stability of such a regime. Politico-economic factors, however, render some policies more sustainable than others, increasing the likelihood of a modified BW II regime with reserve accumulation financed to a greater degree by capital account rather than current account surpluses.