Exchange rate management and capital inflows in selected East Asian countries

Exchange rate management has become a hot debate in academic circles that examines the merits of fixed versus floating regimes. The 1997-98 Asian crisis has refocused attention on the exchange rate management of the East Asian countries. Most views expressed criticize the pre-crisis U.S. dollar-pegged-rate regime as one cause of the crisis. This article examines exchange rate management in the selected East Asian countries from the viewpoint of stability of capital flows. The study’s main findings are as follows: First, the significantly large super-risk premiums against the U.S. were found in the pre-crisis Asian sample countries with the de facto dollar peg regimes. Second, a regression analysis verified the correlation between the super risk premium and the short-term capital inflow. Third, a simulation analysis showed that an alternative inflation-slid management would have had a depressing effect on capital inflows while the basket peg system would not have.