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Appendix 2 The Case for a Common Basket Peg for East Asian Currencies

This appendix reproduces the bulk of a paper that I wrote in 1996 that argued the case for a simultaneous change in the exchange rate peg used by a group of East Asian currencies.1 I assume for the time being that nine economies would be involved: China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan, and Thailand. The reason for picking this group is the impression that they are close competitors to each other; in due course, the appendix examines whether this is in fact sufficiently true to make these economies a natural monetary grouping, as the European Monetary System countries are widely agreed to be. The problem that a common basket peg is intended to address is the instability of the effective exchange rates of the East Asian currencies. As table A2.1 shows, seven of the nine currencies are more unstable in nominal effective terms than in terms of the dollar, and in most cases the instability of the real effective rate is (somewhat) greater still. One way of curing this problem would be for each of the East Asian economies to peg its currency unilaterally to a trade-weighted basket. But, because the trading patterns of the East Asian economies differ, the cur-