The Macroeconomic Performance Of Pegged Exchange Rate Regime

In the 90's, along with the relaxation of various countries' finance control and the fast flowing international capital, the world capital market is more and more unstable. Mexico financial crisis exploded in 1994 and Asia currency crisis occurred in 1997-1998. From them on, economists focused more on the economics performance of exchange rate system. Policymakers also want to know how the exchange rate regimes relate to macroeconomic variables. Based on the history of Asia, Asia countries are still attracted to fixed exchange rate regimes which are pegged to US Dollar.Calvo and Reinhart (2000) pointed out that many countries who officially announced floating exchange rate implement the pegged exchange rate regimes in fact. So if we want to study the economic performance of exchange rate regime, we should classify them correctly on the first.It is generally believed that the pegged exchange rate regime has the following three effects: firstly, the pegged exchange rate regime is connected with low inflation and serves as a nominal anchor; secondly, it can strengthen the macroeconomic discipline and stability and therefore raise the government credibility; Thirdly, it has the economic growth effect (Ghosh and Phillips, 1998; Frankel and Romer, 1999). Based on the IS-LM curve in open economy, the traditional view believe the floating exchange rate regime is advantageous in response to real attack(IS) and the pegged exchange rate regime is advantageous to shield from currency shocks(LM). However, recently study has pointed out that even though the currency crisis always occurs in the period of floating exchange rate regimes, it maybe the result of the preceding exchange rate regimes which are always pegged to dollars in Asia. This article has collected the East Asian five countries (Indonesia, Malaysia, Philippines, South Korea and Thailand) from 1974-2002 macro economic data, including nominal and the actual exchange rate, consumer price index CPI, the current account balance, the government budget, the money supply and nominal and real GDP growth from the source of International Monetary Fund "International finance Statistics".In the third part of the article, I classified the exchange rate regimes of the five countries by the methods of KJ (the de facto classification) and not by the formal way announced by IMF. By the method of KJ, the exchange rate regimes are divided into two groups, pegged group and floating group, which meet the need of this article.In the fourth part of this article, I excluded the years which are preceding pegged exchange rate regimes and followed by currency crisis and study the macroeconomic performance of two groups of exchange rate regimes. This arrangement aims to make sure whether or not the survivorship bias worked in the study of relationship with exchange rate regimes and financial crisis. After this, I study solely on the macroeconomic performance of exchange rate regimes in the currency crisis years.Based on the discussion of this article, I make the following conclusions:Firstly, I agree with Mckinnon on the point that East Asian countries are strongly attracted to the pegged exchange rate regimes and almost all of them choose to peg US dollar. Frankel and Wei also separately use different methods to draw the similar conclusion.Secondly, there are still not enough evidence to able to support the view that low inflation and pegged exchange rate regimes in connected. Also we can not make the conclusion that faster GDP growth and more current account balance are relative to pegged exchange rate regime by theoretical analysis. Thirdly, we study the numerical relations between macroeconomic variables and exchange rate regimes and found that the macroeconomic performance is similar under the two exchange rate regimes. After excluding the survivorship bias, the inflation is even lower under floating exchange rate regimes. This result makes us believe Asia countries are different from other emerging market countries in some ways such as economic modes.Finally, 97 financial crises are different from other financial crisis for many Asia countries'exchange rate regimes collapsed almost at same time. The comparison between 97 Asian financial crisis and the crises in other year tell us 97 financial crisis are more destructive by lower GDP growth and higher inflation.In brief, East Asian countries are different with other emerging market countries in that pegged exchange rate regime is not strictly related to lower inflation and higher GDP growth. There maybe other reasons can explain why Asian countries'policymakers are attracted to pegged exchange rate regimes so much.