Have Asian crisis countries reverted to precrisis exchange rate practices?

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Following the 1997-98 financial turmoil, a number of crisis countries in Asia moved toward floating exchange rate systems, and one (Malaysia) moved to a fixed rate. These changes reinforced the bipolar view of exchange rate regimes and the "hollow middle" hypothesis-a vanishing middle ground between floating and a "hard" peg. But some academics have dissented, arguing that these postcrisis countries have pursued exchange rate policies similar to their precrisis ones and that the middle may not have vanished.

In a recent IMF study, Postcrisis Exchange Rate Policy in Five Asian Countries: Filling in the "Hollow Middle"? authors Leonardo Hernández and Peter Montiel identify and evaluate postcrisis exchange rate policies (up to the end of 2000) in the five countries most severely affected by the Asian financial crisis- Indonesia, Korea, Malaysia, the Philippines, and Thailand. What exchange rate policies did these countries pursue after the crisis? Did they revert to precrisis exchange rate practices? Why did they make the choices they did, and how should these policies be evaluated?

Exchange rate policies and crises

The severe financial crises that many emerging market economies experienced in the last decade have been attributed to many causes. One common contributing factor was the attempt to maintain "soft" pegs-exchange rates pegged in value to some other currency or basket of currencies, with some commitment by the authorities to defend the peg, but with changes in the rate possible if the exchange rate came under significant pressure. In the context of increased integration with international capital markets, it was argued, only the polar extremes-floating or fixed exchange rates supported by very strong commitment mechanisms ("hard" pegs)-can be sustained for extended periods.

Among the crises of the 1990s, the Asian financial crisis of 1997-98 played a key role in forming the perception of a vanishing middle ground for exchange rate regimes in emerging market countries.

Before the crisis struck, the five Asian economies had actively managed their exchange rates, partly to promote their competitiveness-something they saw as an important ingredient in their "miraculous" economic performance. The crisis forced all of these countries to abandon their de facto exchange rate pegs, and the subsequent floats of their currencies were associated with very sharp declines and fluctuations in their values...

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