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Capital markets and exchange rate stabilization in East Asia: Diversifying risk based on currency baskets

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  • Schnabl, Gunther

Abstract

Before and after the Asian crisis, the dollar has been the dominant anchor and reserve currency in East Asia. Due to underdeveloped capital markets and a very limited international role of the domestic currencies, the East Asian countries (except Japan) are likely to continue exchange rate stabilization and accumulation of international reserves. Yet expectations about a further depreciation of the dollar may trigger a broader orientation of exchange rate policies based on basket strategies. While the direction of trade suggests a substantial weight for the Japanese yen in East Asian countries' currency baskets, the role of the euro is enhanced by expectations about its long-term stability. (Rolling) econometric estimations of the basket structures in East Asia suggest growing weights of the euro and the yen in the currency baskets of Indonesia, Korea, Philippines, Singapore, Taiwan and Thailand. In contrast, for China, Hong Kong and Malaysia, the dollar remains the dominant anchor currency.

Suggested Citation

  • Schnabl, Gunther, 2006. "Capital markets and exchange rate stabilization in East Asia: Diversifying risk based on currency baskets," HWWI Research Papers 2-1, Hamburg Institute of International Economics (HWWI).
    • Handle: RePEc:zbw:hwwirp:2-1
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    1. Schnabl, Gunther, 2008. "Exchange rate volatility and growth in small open economies at the EMU periphery," Economic Systems, Elsevier, vol. 32(1), pages 70-91, March.
    2. Volz, Ulrich, 2006. "On the feasibility of a regional exchange rate system for East Asia: Lessons of the 1992/1993 EMS crisis," Journal of Asian Economics, Elsevier, vol. 17(6), pages 1107-1127, December.

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    More about this item

    Keywords

    East Asia; Currency Basket; Exchange Rate Policies; International Role of the Euro;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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