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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