Macroeconomic Policy in East Asia
Relatively Stable Real Exchange Rates
Data and sourceThe real exchange rate is an important price that guides economic development. Real exchange appreciation can hurt export industries and generate current account deficits. Real exchange rate depreciation can foster inflation and lower living standards. The macroeconomy has to be managed so that the real exchange rate is at an appropriate level for a particular country's economic development.
Poor macroeconomic policy can lead to real exchange rate volatility. Attempts to cling to a given nominal exchange rate in the face of domestic inflation can produce significant real appreciation, such as occurred in Mexico in the late 1980's and early 1990's. Over time real exhange rate appreciation can lead to a credit crisis and a dramatic collapse of the nominal exchange rate. The result is real exchange rate volatility and macroeconomic instability that hinders economic growth.
In successfully managing their exchange rates, most high-performance East Asian economies moved from long-term fixed rate regimes, to fixed-but-adjustable rate regimes with occasional steep devaluations, to managed floats. Hong Kong, Malaysia, and Singapore pegged their currencies to the British pound during the Bretton Woods period, then floated them in 1973-74. The Taiwan/China dollar was pegged to the U.S. dollar from 1960 to 1973, then appreciated twice and was floated in 1979. The Thai baht was fixed to the dollar during 1954-84, with a single small devaluation in 1981. In 1984 the baht was devalued and floated as part of an adjustment program. Indonesia fixed the rupiah to the U.S. dollar between 1971 and 1986, with major devaluations in 1978, 1983, and 1986. After the devalution in 1986 Indonesia switched to a managed float. Korea also tied its currency to the dollar between 1961 and 1980. During that period it had four major devaluations and then shifted to a managed float in 1980.
Economic Growth in East Asia