Everything old (in exchange protection) is new again

Mar­tin Wolf tells the EU mem­bers of the G7 who are cry­ing ‘foul’ over Asian exchange rate pro­tec­tion to suck it up. bq. Asian coun­tries have cho­sen “the same periph­ery strat­e­gy as imme­di­ate post­war Europe and Japan, under­valu­ing the exchange rate, man­ag­ing size­able for­eign exchange inter­ven­tions, impos­ing con­trols [on cap­i­tal], accu­mu­lat­ing reserves, and encour­ag­ing export-led growth by send­ing goods to the com­pet­i­tive cen­tre coun­tries (“Finan­cial Times(subscription page of the FT)”:http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1075982437393&p=1012571727126) Wolf refers to an inter­est­ing the­o­ry put for­ward by Michael Doo­ley et al. about the incen­tives for exchange rate pro­tec­tion by the new Asian mon­e­tary ‘periphery’—although it real­ly sounds a bit biz­zare to describe Chi­na as part of a ‘periph­ery’.  bq. The eco­nom­ic emer­gence of a fixed exchange rate periph­ery in Asia has reestab­lished the Unit­ed States as the cen­ter coun­try in the Bret­ton Woods inter­na­tion­al mon­e­tary sys­tem. We argue that the nor­mal evo­lu­tion of the inter­na­tion­al mon­e­tary sys­tem involves the emer­gence of a periph­ery for which the devel­op­ment strat­e­gy is export-led growth sup­port­ed by under­val­ued exchange rates, cap­i­tal con­trols and offi­cial cap­i­tal out­flows in the form of accu­mu­la­tion of reserve asset claims on the cen­ter coun­try. The suc­cess of this strat­e­gy in fos­ter­ing eco­nom­ic growth allows the periph­ery to grad­u­ate to the cen­ter. Finan­cial lib­er­al­iza­tion, in turn, requires float­ing exchange rates among the cen­ter coun­tries. But there is a line of coun­tries wait­ing to fol­low the Europe of the 1950s/60s and Asia today suf­fi­cient to keep the sys­tem intact for the fore­see­able future. (“NBER”:http://www.nber.org/papers/w9971)

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