Which exchange-rate regime in East Asia?

The 1997 crisis has led most East Asian countries to give up the defacto dollar peg and to let their currencies fluctuate. This choice is considered as optimal by many observers and economists. Indeed, there is a common wisdom which considers that intermediate exchange-rate arrangements are not desirable and that only two corner solutions "free floats" and "hard pegs" are appropriate. We claim that this recommendation is not well suited for East Asian countries. On the one hand, financial markets in East Asia are not strong enough to dampen excessive exchange rate volatility associated with free floating. This is proved by the current retreat to the defacto dollar peg, as implicitly encouraged by the Chiang Mai Agreement. On the other hand, hard pegs: currency board, dollarisation, and currency union, are not appropriate. This is obvious for currency board and dollarisation since East Asian countries do not suffer from inflation and have diversified trade and financial linkages. Currency union, such as a Yen bloc, is not yet possible since political integration in Asia is far behind the degree of economic integration. Therefore, intermediate arrangements or soft pegs still have some legitimacy in East Asia. Which soft peg is optimal remains quite controversial in the literature. However, a consensus seems to appear about the required features of the peg. It should be common to East Asian countries rather than individuals and should include at least the G3 currencies. Above all, it should allow a large degree of flexibility, thereby providing some autonomy for monetary policy and preserving sovereignty. Consequently, a Band-Basket-Crawl (BBC) rule seems to be the more appropriate exchange-rate regime for East Asian countries.