Table Of ContentEXCHANGE RA TE REGIMES
AND MACROECONOMIC
STABILITY
EXCHANGE RATE REGIMES
AND MACROECONOMIC
STABILITY
edited by
Lok-Sang Ho
Lingnan University
Hong Kong
Chi-Wa Yuen
University of Hong Kong
Peking University and Wuhan University
Hong Kong
SPRINGER SCIENCE+BUSINESS MEDIA, LLC
Exchange Rate Regimes and Macroeconomic Stability
edited by Lok-Sang Ho and Chi-Wa Yuen
ISBN 978-1-4613-5365-2 ISBN 978-1-4615-1041-3 (eBook)
DOI 10.1007/978-1-4615-1041-3
Copyright@ 2003 Springer Science+Business Media New York
Originally published by Kluwer Academic Publishers in 2003
Softcover reprint of the hardcover 1st edition 2003
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CONTENTS
List of Contributors
Vll
F oreword Assaf Razin
Xl
Acknowledgments xm
Chapter 1 Introduction 1
Lok-Sang Ho and Chi-Wa Yuen
Part 1 The Asian Currency Crisis: Responses and Policy Options 7
Chapter 2 Lessons from the Asian Financial Crisis, and the Prospects
for Resuming High Growth 9
Wing Thye Woo
Chapter 3 Financial Market Stability, Monetary Policy, and the IMF 33
Joseph Stiglitz
Chapter 4 The IMF Approach to the Asian Currency Crises: An
Alternative View 55
Charles Adams
Chapter 5 Does Asia Need a Common Currency? 61
Robert Mundell
Chapter 6 Recommending a Currency Basket System for Emerging
East Asia 77
Masahiro Kawai
Part 2 Monetary Policy, Exchange Rate Regimes, and
Macroeconomic Stability 105
Chapter 7 A Comparative Analysis ofExchange Rate Regimes 107
Naoyuki Yoshino, Sahoko Kaji and Ayako Suzuki
vi Exchange Rate Regimes and Macroeconomic Stability
Chapter 8 Bringing about Realistic Exchange Rates: A Post-Asian
Financial Crisis Perspective 133
Lok Sang Ho
Chapter 9 Contemplating the Credibility of Currency Boards 145
Corrinne Ho
Chapter 10 Currency Board, Asian Financial Crisis, and the Case for
Put Options 185
Francis T. Lui, Leonard K. Cheng and Yum K. Kwan
Chapter 11 The Currency Board in Hong Kong: Operational
Weaknesses and a Proposed Refinement Scheme 215
Alex W.H. Chan
Postscript Understanding Crises 247
Chi-Wa Yuen
Index 251
LIST OF CONTRIBUTORS
Charles Adams is Assistant Director at the IMF's Regional Office for Asia
and the Pacific. During 2000/2001, he was on a one-year leave of
absence at the Asian Development Bank, where he was a senior
economic advisor. He has held various positions during his
nineteen-year career at the Fund including in the Research, Asia and
Pacific, and Policy Development and Review departments.
Alex W.H. Chan is Assistant Professor in the School of Economics and
Finance of the University of Hong Kong. His research interests are the
areas of derivative valuation, investments, risk management, and
exchange rate systems.
Leonard K. Cheng, Ph.D. (California-Berkeley), is Professor and Head ofthe
Department of Economics at the Hong Kong University of Science and
Technology. His research fields are international economics, foreign
direct investment, market structure, and technological innovation and
imitation.
Corrinne Ho is an economist in the Monetary and Economic Department of
the Bank for International Settlements. Prior to joining the BIS, she was
a student and lecturer at Princeton University. Her fields of interest
include exchange rate, monetary policy and economic institutions.
Lok Sang Ho is Director of the Centre for Public Policy Studies, Lingnan
University, Hong Kong and Hon. Research Fellow at the Chinese
University of Hong Kong. He has been President of the Hong Kong
Economic Association since 1999. His Kluwer book, Principles 01
Public Policy Practice, reflects his wide interest in a wide spectrum of
policy issues.
Sahoko Kaji holds a Ph.D. in economics from the Johns Hopkins University.
She has been Professor of Economics at Keio since 1999. She had
published in leading economic journals on international economic
issues such as financial crisis and the EMU.
viii Exchange Rate Regimes and Macroeconomic Stability
Masahiro Kawai is Deputy Vice Minister for International Affairs at Japan's
Ministry ofFinance since July 2001. He was formerly Chief Economist
of the World Bank's East Asia and Pacific Region, and prior to April
1998, Professor of Economics at the Institute of Social Science of the
University of Tokyo. He holds a Ph.D. in economics from Stanford
University.
Yum K. Kwan is Associate Professor ofEconomics at the City University of
HongKong.
Francis T. Lui, PhD (University of Minnesota) is Professor of Economics
and Director of Center for Economic Development at the Hong Kong
University of Science & Technology. His research interests include
endogenous growth, population economics, social security, corruption,
and exchange rate regimes.
Robert Mundell is University Professor ofEconomics, Columbia University.
He is the 1999 Nobel Laureate in Economic Science.
Joseph E. Stiglitz is the 2001 Nobel Laureate in Economics and Professor of
Economics, Business, and International Affairs at Columbia University.
Ayako Suzuki received her BA in economics from Keio University in 1994.
She received her MPhil in International Finance from the University of
Glasgow in 1998 and is now enrolled in the doctoral programme at the
Department ofEconomics at the Johns Hopkins University.
Wing Thye Woo, Professor of Economics, University of California, Davis,
specialises in open-economy macroeconomics, and economic growth,
and has expertise in the economies of China, India, Indonesia, Iran,
Korea, Malaysia, Mongolia, Taiwan, and Vietnam. He is also the
Director of the East Asia Pro gram of the Earth Institute at Columbia
University.
Naoyuki Y oshino holds a Ph.D. in economics from Johns Hopkins
University. He had been Assistant Professor at the State University of
New Y ork at Buffalo and Visiting Scholar at the Massachusetts
Institute of Technology. He is now Professor of Economics at Keio
University. He coauthored with Thomas Cargill a book The Postal
Saving System and the Fiscal Investment and Loan Program in Japan
(Oxford University Press, 2002).
List ofContributors ix
Chi-Wa Yuen, a Chicago PhD and a macroeconomist, is currently teaching
at the University of Hong Kong, Peking University, and Wuhan
University. With Jacob Frenkel and Assaf Razin, he is co-author of
Fiscal Policies and Growth in the World Economy, a popular graduate
text in open-economy macro.
FOREWORD
The Asian crisis of 1997-1998 could be viewed as a watershed in our
macroeconomic thinking concerning exchange rate regimes, the functioning
of il).ternational institutions, such as the IMF and the World Bank, and
international contagion of macroeconomic instability from one country to
another. In the now famous annual meeting ofthe IMF and the World Bank
held in Hong Kong in September 1997, shortly after the outbreak of the
Asian crisis, officials of the international institutions pushed for the
deregulation of capital flows, as an obligation of any member of the IMF.
This position, seemingly a bureaucratic inertia, was in disregard to the nature
of the balance of payments problems that the country could be subject to, or
the soundness and credibility of its financial institutions.
Old issues were subject to renewed inteHectual scrutiny. Should
crisis-stricken countries raise interest rates? On the one hand, raising interest
rates could restore monetary balance by strengthening domestic currency.
On the other hand, by raising the interest rate the central bank places
pressures on financial intermediaries and firms with heavy loads of
short-term debt and thus can weaken the exchange rate.
This fine book offers perspectives on this debate from the viewpoints of
two Nobellaureates, an IMF economist, and Asian economists. It contains a
selection of papers, mostly chosen from the bi-annual meetings of the Hong
Kong Economic Association that took place in December 2000. It
contributes interesting new ideas to the ongoing inteHectual debate on the
role of domestic monetary authorities and international institutions in
reducing the likelihood of international financial crises, as weH as the
problems associated with various exchange rate regimes from the standpoint
of macroeconomic stability.
AssafRazin
Tel Aviv University and Cornell University
ACKNOWLEDGMENTS
The editors and the Hong Kong Economic Association acknowledge
with thanks the support from the Hong Kong Institute for Monetary
Research, the Bank of East Asia, and the Asian Development Bank in
making the First Biennial Conference of the Hong Kong Economic
Association possible. Most of the articles included in this volume were
first presented in that Conference. We also thank Blackwell Publishers for
permission to reproduce articles by Stiglitz and by Mundell earlier published
in Pacific Economic Review, and Palgrave for permission to include an
article by Lok Sang Ho largely adapted from a chapter first published in
Twenty First Century W orld Order and the Asia Pacific, edited by James C.
Hsiung.
