Exchange Rate Regime And Financial Crisis

Since the breakup of the gold standard, the world economy has suffered from the distress of financial crisis. Especially, from the beginning of the1990s, financial crisis broke out frequently in emerging market countries, which caused great damage to these economies. It’s found that these countries in crisis almost implemented pegged exchange rate regimes. The phenomenon opened up a new perspective on the discussion of exchange rate regime. People began to research on the choice of exchange rate regimes in developing countries from the point of financial stability. Is there a link between exchange rate regime and financial crisis? The matter has become more and more important under the background of higher capital mobility and higher financial instability nowadays. Especially for developing countries with poor domestic financial and legal systems, it’s more urgent to research on exchange rate regime from the point of sustainability and crisis prevention.The paper mainly researches on the choice of exchange rate regimes for East Asian countries from the perspective of financial crisis by using methods of both theoretical research and empirical research. Firstly, based on the history and reality of exchange rate regimes of East Asian countries, it investigates the characteristics of the regimes. It finds out that both before and after East Asian financial crisis, these countries implement US dollar peg exchange rate regimes. Then, the paper comes up with some theoretical explanations on this. Secondly, it studies on the inadaptability of the existing US dollar peg exchange rate regime according to the reality of East Asian countries and unsustainability of the exchange rate regime from the view of currency crisis. Thirdly, the paper investigates the empirical relationship between exchange rate regime choice and the probability of currency crisis. It establishes a panel logit model with the sample of relevant data in South Korea, Indonesia, Malaysia, the Philippines and Thailand during the period1980-2003. The empirical result shows that compared to floating exchange rate regime, pegged exchange rate regime increases the probability of currency crisis. Finally, based on the discussion above, the paper comes to some enlightenment and put forward some advice for East Asian countries’and China’s exchange rate regime reform.