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1、The East Asian Dollar Standard and Chinas Exchange Rate Ronald McKinnonStanford UniversityApril, 2005The Exchange Rate Debate in the 1990sThe Exchange Rate Debate in the 1990sBefore 1997, East Asian countries, except for Japan, “softly” pegged their exchange rates to the U.S. dollar.1997-98 Crisis:

2、Thailand, Indonesia, Philippines, Korea, and Malaysia are attacked and devaluewith bankruptcies and economic downturns spreading contagiously.The IMF blames the soft pegging for encouraging over borrowing and current account deficits leading unsustainable dollar and yen debts. It warns against any r

3、eturn to dollar pegging.Williamson (2000), Kawai (2002), Ogawa and Ito (2002)suggest weighting the Japanese yen more heavily in the currency baskets of the smaller East Asian economies in the face of wide fluctuations in the yen/dollar rate.The Debate In the New MillenniumThe Debate In the New Mille

4、nnium By 2003 into 2005, the East Asian “crisis” and non crisis economies had returned to soft dollar pegging. China and Hong Kong retained hard pegs through the crisis, and Malaysia pegged in Sept 1998 at 3.8 ringgit per dollar. Even the yen/dollar rate is more stable. But now all East Asian countr

5、ies run large current account surpluseseven with net inflows of FDI (China). In 2003 and 2004, only massive official interventions kept their exchange rates from appreciating. Intensified pressure from the IMF, the G-7, and the U.S. Treasury, for China to appreciate: “There should be more flexible c

6、urrencies, not only for China but the whole of Asia” Rodrigo de Rato, IMF Managing Director, 29 Sept 2004 at IMF-World Bank Meetings in Washington.Table 3: East Asian Current Accounts in Table 3: East Asian Current Accounts in Comparison to the U.S., 1990-2003Comparison to the U.S., 1990-2003 199119

7、92199319941995199619971998199920002001200220032004*Percent of GDPJapan2.03.03.02.72.11.42.33.02.62.52.12.83.23.7Singapore11.311.97.216.217.715.215.622.618.614.519.021.530.919.8Taiwan7.14.13.12.72.13.92.41.32.82.96.49.110.06.6Indonesia-3.3-2.0-1.3-1.6-3.2-3.4-2.34.34.15.34.94.53.90.5Korea-2.8-1.30.3-

8、1.0-1.7-4.4-1.712.76.02.71.91.32.04.2Malaysia-8.5-3.7-4.5-6.1-9.7-4.4-5.913.215.99.48.37.611.113.7Philippines-2.3-1.9-5.6-4.6-2.7-4.8-5.32.49.58.21.85.42.13.2Thailand-7.7-5.7-5.1-5.6-8.1-8.1-2.012.710.17.65.46.15.64.5China3.31.40.01.30.20.94.13.32.11.91.52.92.13.4Hong Kong 1.56.44.36.18.511.08.1Unit

9、ed States0.1-0.8-1.2-1.7-1.4-1.5-1.5-2.3-3.1-4.2-3.9-4.6-4.9-5.6Billions of US DollarsTotal East Asia73.8117.5117.8132.993.844.2129.4244.5231.7213.7179.1238.9255.2335.5Total US3.7-48.0-82.0-117.7-105.2-117.2-127.7-204.7-290.9-411.5-393.7-480.9-541.8-661.3Data source: IMF: IFS. *Preliminary from EIU

10、dataThis Paper and McKinnon Book (2005) This Paper and McKinnon Book (2005) The Case for Asian Dollar PegsThe Case for Asian Dollar Pegs East Asian economies Have sufficient fiscal and monetary control to target exchange rates, but have more difficulty targeting domestic inflation independently. Are

11、 becoming highly integrated economically with more than 50% of trade with each other. They need stable cross rates of exchange. Under developed domestic bond and forward exchange markets make currency risks more difficult to hedge. Current account surpluses need not diminish if currencies appreciate

12、, as is likely under floatingThe Rise of Intra Regional Trade in East Asia, 1980-The Rise of Intra Regional Trade in East Asia, 1980-2002 (share of total exports)2002 (share of total exports)Exports01020304050Intra East AsiaUnited StatesRest of the WorldPercentage198019902002East Asia: China, Hong K

13、ong, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand The Rise of Intra Regional Trade in East Asia, 1980-The Rise of Intra Regional Trade in East Asia, 1980-2002 (share of total imports)2002 (share of total imports)Imports0102030405060Intra East AsiaUnited StatesRest

14、of the WorldPercentage198019902002East Asia: China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand Invoice Currencies in Korean Trade, 1980Invoice Currencies in Korean Trade, 19802002 (percent)2002 (percent) Exports (receipts)Imports (payments)$DMother$DM

15、other198096.11.22.00.40.393.23.71.70.50.9198594.73.70.60.30.782.412.32.00.52.8199088.07.82.10.51.779.112.74.10.93.4199588.16.52.40.82.279.412.73.80.73.4200084.85.41.80.77.380.412.41.90.84.4200286.85.25.80.81.480.612.15.40.61.3Source: Bank of Korea: Monthly Statistical Bulletin. Trade in services is

16、not included. DM represents the euro starting from 2000.Figure 1: East Asian Exchange Rate Pegs against Figure 1: East Asian Exchange Rate Pegs against the Dollar, 1980:01-2004:04 (Monthly)the Dollar, 1980:01-2004:04 (Monthly) Taiwan DollarSingapore DollarHong Kong DollarChinese Yuan0100200300400500

17、6007008001980.011983.011986.011989.011992.011995.011998.012001.012004.0101002003004005006007008001980.011983.011986.011989.011992.011995.011998.012001.012004.0101002003004005006007008001980.011983.011986.011989.011992.011995.011998.012001.012004.0101002003004005006007008001980.011983.011986.011989.0

18、11992.011995.011998.012001.012004.01Figure 1 (Continued) Crisis Economies, 1980:01-Figure 1 (Continued) Crisis Economies, 1980:01-2004:04 (Monthly)2004:04 (Monthly)Thai BahtPhilippine PesoMalaysian RinggitKorean WonIndonesian Rupiah050010001500200025001980.011983.011986.011989.011992.011995.011998.0

19、12001.012004.0101002003004005006007008001980.011983.011986.011989.011992.011995.011998.012001.012004.0101002003004005006007008001980.011983.011986.011989.011992.011995.011998.012001.012004.0101002003004005006007008001980.011983.011986.011989.011992.011995.011998.012001.012004.01010020030040050060070

20、08001980.011983.011986.011989.011992.011995.011998.012001.012004.01Frankel and Wei Regression (1994)Frankel and Wei Regression (1994)trancMarkSwissfancYenSwissfrsfrancDollarSwisssfrancurrencySwiEastAsiancueeeetttt4321Problem: For any one East Asian currency other than Japan, how do you measure the w

21、eight of each major currencythe dollar, yen, or euroin its currency “basket”?Answer: Choose an outside currency as numeraire, e.g., the Swiss Franc, to measure all exchange rates in the above regression.Figure 2: Dollars Weight in East Asian Currency Baskets, Figure 2: Dollars Weight in East Asian C

22、urrency Baskets, 130-Trading-Day Rolling Regressions, 1990:01-2004:05130-Trading-Day Rolling Regressions, 1990:01-2004:05 (Daily)(Daily) Taiwan DollarSingapore DollarHong Kong DollarChinese Yuan0.00.20.40.60.81.01.21.41.601.01.1990 01.01.1993 01.01.1996 01.01.1999 01.01.20020.00.20.40.60.81.01.21.41

23、.601.01.199001.01.199301.01.199601.01.199901.01.20020.00.20.40.60.81.01.21.41.601.01.1990 01.01.1993 01.01.1996 01.01.1999 01.01.20020.00.20.40.60.81.01.21.41.601.01.1990 01.01.1993 01.01.1996 01.01.1999 01.01.2002Thai BahtPhilippine PesoMalaysian RinggitKorean WonIndonesian Rupiah0.00.20.40.60.81.0

24、1.21.41.601.01.1990 01.01.1993 01.01.1996 01.01.1999 01.01.20020.00.20.40.60.81.01.21.41.601.01.1990 01.01.1993 01.01.1996 01.01.1999 01.01.20020.00.20.40.60.81.01.21.41.601.01.1990 01.01.1993 01.01.1996 01.01.1999 01.01.20020.00.20.40.60.81.01.21.41.601.01.1990 01.01.1993 01.01.1996 01.01.1999 01.0

25、1.20020.00.20.40.60.81.01.21.41.601.01.1990 01.01.1993 01.01.1996 01.01.1999 01.01.2002Figure 2: Dollars Weight in East Asian Currency Baskets, Figure 2: Dollars Weight in East Asian Currency Baskets, 130-Trading-Day Rolling Regressions, 1990:01-2004:05130-Trading-Day Rolling Regressions, 1990:01-20

26、04:05 (Daily)(Daily) Table 1: Standard Deviations of Daily Exchange Table 1: Standard Deviations of Daily Exchange Rate Fluctuations against the DollarRate Fluctuations against the DollarPre-crisisCrisisPost-crisis2003/2004Chinese Yuan0.030.010.000.00Hong Kong Dollar0.020.030.030.05Indonesian Rupiah

27、0.174.431.110.43Korean Won0.222.350.430.43Malaysian Ringgit0.251.530.000.00Philippine Peso0.371.310.510.25Singapore Dollar0.200.750.270.29New Taiwan Dollar0.190.500.210.20Thai Baht0.211.550.380.27Japanese Yen0.671.000.640.57Euro (Deutsche Mark)0.600.580.640.64Swiss Franc0.690.660.660.70Data source:

28、Datastream. Percent changes. Pre-crisis = 02/01/94 05/30/97, crisis = 06/01/97 12/31/98, post-crisis = 01/01/99 05/17/04, 2003/2004 = 01/01/03 05/17/04. Dollar dominance in East AsiaDollar dominance in East AsiaOriginal sin Underdeveloped domestic bond market or in some cases developed domestic bond

29、 market (India) Debtors cannot borrowborrow in own currency nor can they hedge their net dollar indebtedness. Currency mismatch and maturity mismatch. Eichengreen and Hausmann 1999, Hausmann and Panizza 2003Conflicted virtue Creditors cannot lendlend in their own currencies nor can they hedge their

30、net dollar assets. Currency mismatch but no necessary maturity mismatch McKinnon and Schnabl 2004, McKinnon 2005Fun with TranslationFun with Translation 名詞翻譯 Conflicted virtue High-saving dilemma: 高儲蓄兩難 Original sin: 原罪 (Christian) Sin from the past life: 前世之罪 (Buddhist)Conflicted virtueConflicted v

31、irtueHigh-saving countries run current account surpluses but lend in dollars. However, as their stocks of dollar claims cumulate: Foreigners start complaining that the countrys ongoing flow of trade surpluses is unfair and the result of having an undervalued currency. Domestic private holders of dol

32、lar assets worry more about a self-sustaining run into the domestic currency forcing an appreciation. Domestic interest rates are bid down, perhaps to zeroConflicted virtue: Conflicted virtue: To appreciate or not to appreciateTo appreciate or not to appreciate As runs into the domestic currency out

33、 of dollars begin, the government is “conflicted” because (repetitive) appreciation could set in train serious deflation ending with a zero interest liquidity trap (Japan) But failure to appreciate could elicit trade sanctions from foreigners. A “free” float becomes an indefinite upward spiralThe st

34、ory of Japan (I)The story of Japan (I) There were repetitive appreciations of yen from 1970s to mid-90s under mercantile pressure from trade partnersparticularly the United States. But trade surpluses continued to cumulate. Reason: Exchange rate changes only determine domestic inflation or deflation

35、, not trade balance. The simple-minded elasticities approach (Marshall-Lerner condition) to determining the trade balance is invalid in financially open economies. McKinnon and Ohno 1997The story of Japan (II)The story of Japan (II) Negative risk premium Goyal and McKinnon 2003 To maintain portfolio

36、 balance, Japanese financial institutions demand a higher return on dollars (which is riskier given the volatility in exchange rate). But the interest rate on dollar assets is determined internationally. Thus the interest rate on yen assets was forced down leading to a zero interest liquidity trap b

37、y the end of 1996.Is China like Japan?Is China like Japan? China has a big advantage over Japan:The RMB exchange rate has been, and can be, more credibly maintained at the current level without disturbing domestic price level. And a disadvantage:Chinas net FDI inflows are much larger than Japans. FD

38、I can be seen as illiquid liabilities but adds to liquid dollar claims.Figure 7: International Investment Position Figure 7: International Investment Position of Japan (Billions of Dollars)of Japan (Billions of Dollars) -2000200400600800100012001400160019801982198419861988199019921994199619982000200

39、2billions of dollarstotalpublicprivateSource: Japan: Ministry of Finance.The The Yen-Dollar Nominal Exchange RateYen-Dollar Nominal Exchange Rate, , 1970 - 20051970 - 2005Source: International Financial Statistics, IMFImplications for Interest Rates: Implications for Interest Rates: The Negative Ris

40、k PremiumThe Negative Risk Premium To sustain the interest differential between yen and dollar assets, consider an augmented interest parity relationship: From the 70s to the mid 90s, the interest differential, i i*, was driven primarily by the negative term from the erratically appreciating yen, wh

41、ich peaked in April 1995. Since the mid-90s, 0 and the interest differential has been driven primarily by the term, which is also negative (Goyal and McKinnon 2003, McKinnon 2005).esii* i sJapanese nominal interest rate.Yen price of one dollarRisk premium on yen assetsi*U.S. nominal interest rateExp

42、ected depreciation of the yenesesesFigure 8: Interest Rates in the US and Japan, Figure 8: Interest Rates in the US and Japan, Long-Term: 10-Year US Treasuries and Long-Term: 10-Year US Treasuries and JGBsJGBs, , 1980-20041980-200402468101214161980M11983M11986M11989M11992M11995M11998M12001M12004M1pe

43、rcent per annumJapanUSFigure 8: Interest Rates in the US and Japan, Figure 8: Interest Rates in the US and Japan, Short-Term: Money Market Rates, 1980-2004Short-Term: Money Market Rates, 1980-2004024681012141618201980M11983M11986M11989M11992M11995M11998M12001M12004M1percent per annumJapan (call mone

44、y rate)US (federal funds rate)Interest Differentials, Portfolio Balance, and Interest Differentials, Portfolio Balance, and the Impossibility Free Floatingthe Impossibility Free Floating As dollar claims accumulate, a sufficiently large interest differential to induce private portfolio holdings of d

45、ollars becomes unsustainableas in Japan when yen interest rates approach zero. The problem worsens when US interest rates are unusually low, as in 2003 and 2004. Then, increasing official foreign exchange reserves become the dominant mode of financing Asian current account surpluses. And the private

46、 unwillingness to hold dollars makes a free float impossible. Table 4: East Asian Current Accounts (CA) Table 4: East Asian Current Accounts (CA) and Changes in Foreign Reserves (RC): 1997 and Changes in Foreign Reserves (RC): 1997 - 2003- 2003 Billions of Dollars 19971998199920002001200220032004*Ja

47、panCA9711911512088112136172 RC1-574704164201171SingaporeCA1519151316192820 RC-6423-57148TaiwanCA738918262920 RC-5716115394535IndonesiaCA-54687881 RC-2642-1440KoreaCA-8402412861228 RC-143222227183444MalaysiaCA-610138771116 RC-655-1141012PhilippinesCA-42761423 RC-3240000-1ThailandCA-3141296887 RC-1235

48、-20638ChinaCA3731212117353155 RC35510114774117181HK SARCAn.a.310710141713 RC29-37114165East AsiaCA133241230217182248255335 RC1956148117109216434463Data source: IMF: IFS. *Preliminary from EIU dataFigure 10: US and cumulative East Asian Figure 10: US and cumulative East Asian Current Accounts (Billio

49、ns of US Dollars)Current Accounts (Billions of US Dollars) Data source: IMF: IFS. “Revived Bretton Woods” EA Exchange Rates deliberately undervalued to generate a trade surplus. Exports are desired to promote “development”, particularly in manufacturing. Asian governments are willing to invest in ve

50、ry low yield US Treasuries, and to accept American FDI with high profit repatriation. US gets finance for its fiscal deficits The ongoing US current-account deficit need not be corrected in the near futureThe Dollar Standard and East Asias Trade Surplus: The DFG Interpretation* Dooley, Folkerts-Land

51、au, and Garber (2003)-(2004).The Dollar Standard and East Asias Trade Surplus: The MCK Interpretation, I The current regime: With the dollar as international money, the efficiency of world trade and payments increases. With a stable U.S. price level, peripheral countries will peg to the dollar to an

52、chor their own price levelsparticularly East Asian countries highly integrated in trade. They converge to relative purchasing power parity (PPP) if nominal exchange rates remain fixed: no exchange rate “undervaluation”The Dollar Standard and East Asias Trade Surplus: The MCK Interpretation, II Propo

53、sed East Asian exchange rate changes: discrete appreciation or floating No predictable effect on net trade balances Any appreciation will slow economic growth and lead to deflation Loss of credibility to maintain the exchange rate at any level Possibility of an indefinite upward spiral in the dollar

54、 value of East Asian currencies The Dollar Standard and the United States: MCK InterpretationThe unlimited US credit line with the rest of the world softens borrowing constraints on US households, and the federal government. Federal fiscal deficits are financed by selling dollar bonds to foreigners

55、at low interest rates.Large current account deficits are sustainable “indefinitely” because of the central international monetary position of the United States.The upshot of easy foreign borrowing is: falling US saving, both government and private, for more than 20 years. deindustrialization, loss o

56、f jobs in manufacturing, leading to protectionist pressure.US Current Account and Manufacturing US Current Account and Manufacturing Sector Trade Balance: 1965 - 2004Sector Trade Balance: 1965 - 2004(Percentage of GDP)Projection of Labor Growth in Manufacturing under Projection of Labor Growth in Ma

57、nufacturing under Balanced Manufacturing Trade: 1965 - 2004Balanced Manufacturing Trade: 1965 - 2004(Share of US Labor Force)American Fiscal and Trade Deficits The Fed creates the definitive international money. An attack on the dollar is unlikely because US debts are denominated in its own currency

58、. But heavy US foreign borrowing is transferred in real terms through large American trade deficits, mainly in manufactures. The American concern with de-industrialization, i.e., unduly rapid job losses in manufacturing, should be linked to Federal fiscal deficits and low American personal saving. T

59、he Exchange Rate and International Adjustment Two Contradictory Views1. A flexible exchange rate is useful for adjusting the net trade balance to net international capital flows2. A fixed exchange rate can anchor the domestic price level by inducing money wage growth that balances differential produ

60、ctivity growth across countries This paper pursues 2. on the presumption that 1. is false and misleading for open economies McKinnon and Ohno (1997) Chs 6 and 7Balancing International Competitiveness:The Scandinavian Model (SM) Wage adjustment and relative Purchasing Power Parity (PPP) under a fixed

61、 exchange rate Sweden, 1948 to 1971 5.17 kronor per dollar Japan, 1949 to 1971360 yen per dollar China, 1994 to 20058.28 yuan per dollarScandinavian ModelAssumptions: Inflation in tradables sector converges to world inflation plus any exchange rate depreciation (relative PPP) Wage bargaining is init

62、iated in the high-productivity-growth tradables sector (manufactures) subject to the exchange rate constraint Labor “solidarity”: wage growth in other sectors with lower productivity growth follows that in tradables Result: International competitiveness between fast- and slow- growing economies is a

63、utomatically balanced by differential growth in wages.SM Definitions= world market prices for tradables= exchange rate = aggregate price level = domestic price level for tradables and nontradables, respectively= wage rate in the tradable and nontradable sector, respectively= labor productivity in th

64、e tradable and nontradable sector, respectivelywpNTpp,NTww ,NTqq ,epSM AssumptionsNTNTNTwNNNTNTTTwTqqpppqqepqwpwwqpwepp)1 (Relative PPPWage bargaining in tradables: constant factor sharesLabor solidarityNontradables price based on labor cost General price index ( CPI) with constant weightsHigher pro

65、ductivity growth in tradables SM: General Supply-Side Inflation No independent demand-side national monetary policy Tradable price increases are transmitted directly into domestic inflation through the foreign exchanges Additional general price inflation is proportional to the difference in producti

66、vity growth between the two sectors weighted by the importance of nontradables Even when exchange rates are fixed, inflation can differ across countries with different productivity growth. NTwqqepp1Imported InflationStructural InflationExchange Rate Induced InflationChina, Convergence of CPI Inflation with the China, Convergence of CPI Inflation with the United States: Relative PPPUnited States: Relative PPP(Source: EIU)Determinant SM Wage Bargaining with a Determinant SM Wage Bargaining with a