Following the 1997 economic crisis in Asia there is a continuing debate on the appropriate exchange rate regime for Asian economies. A number of alternative exchange rate regimes have been proposed but there has been little empirical assessment of the consequences of the alternatives for the individual Asian economies. This paper offers some preliminary empirical evidence on the impacts of alternative regimes using a global empirical model containing considerable detail on individual Asian economies including both sectoral dis-aggregation for each economy, macroeconomic features, and the linkages between countries in the region through international trade of goods and financial assets.
In evaluating the performance of alternative exchange rate arrangements in Asia for output and inflation variability, this paper considers a number of shocks. The exchange rate regimes compared are floating exchange rates throughout Asia (with each central bank targeting inflation) and three forms of fixed exchange rates: a basket peg in which each Asian economy pegs their exchange rate to a basket of the Euro, $US and Yen (with Japan pegging to a basket of the Euro and $US); a Yen zone in which each Asian economy pegs their exchange rate to the Yen (and the Bank of Japan targets inflation); and an Asian Currency Unit in which a single currency circulates in Asia and an Asian central bank targets average Asia-wide inflation. The shocks considered are shocks to aggregate demand, aggregate supply and economy wide risk that are either global, Asia wide or country specific.
Not surprisingly, given the empirical literature for industrial economies from the last two decades, we find that the appropriate exchange rate regime varies across countries depending on, amongst other things, the economic structure of each country as well as the nature of the shocks hitting each economy, and the target variables that policymakers care about. No regime dominates for all shocks but the regimes of floating and a basket peg to the $US, Euro and yen generally perform better than the Asian currency union on Yen zone regimes.
Mao Zedong did not see the value of reform and opening up. The China part of Nixon’s 1967 Foreign Affairs article suggested an implicit bargain that provided the conceptual basis for China’s new direction after 1978. That bargain was if China focused on domestic development and didn’t threaten the security of its neighbours, the United States would help.
Sentiment inside the Beltway has turned sharply against China. There are many issues where the two parties sound more or less the same. Trump and others in the administration seem heavily invested in a ‘get very tough with China’ stance. It’s possible that some Democrats might argue that a decoupling strategy borders on lunacy. But if Trump believes this will play well with his core constituencies as his reelection campaign moves into high gear, he will probably decide to stick with it, if the costs and the collateral damage seem manageable. But that’s a very big if, especially if the downsides of a protracted trade war for both American consumers and for American firms become increasingly apparent.