Exchange rate regimes for emerging market economies: Lessons from Asia

This article discusses the role of the exchange rate regime in the 1997 East Asian crisis. Most of the countries had, more or less, fixed-but-adjustable exchange rate regimes before the crisis. The article outlines special problems of this regime when there is high capital mobility, including the loss of political credibility that results when governments cannot maintain fixed exchange rates to which they have committed. The article discusses how the crisis would have played out under alternative exchange rate regimes, namely floating rates and currency boards. There would still have been a boom followed by a crisis, though in the short run, the recessions might have been less deep. The article also discusses Hong Kong's currency board regime; the reasons the Indonesian crisis was especially severe; the reasons some Asian countries, notably India, avoided a crisis; and the role of capital controls, especially in Malaysia.