Friday, October 23, 2009

Asian Central Banks at a Crossroads

Matthew Brown and Patricia Lui write: "Asian central banks are running out of ammunition to fight their currencies’ biggest rally since 1998, paving the way for South Korea, Taiwan, Indonesia, Thailand and India to help lead foreign-exchange performance next year".

Their options ? Appreciation and a collapse in export production, with a rise in unemployment. Or rapid inflation as "as they flood their economies with local currencies sold for foreign cash". This can also lead to the kind asset bubbles blowing up in coastal China.

There also might be the return of capital controls, such as Brazil recently implemented.

The simple answer would be to grow internal markets. But, as Jeffrey Frieden notes, "political economies dominated by powerful export interests face fundamental challenges to those interests, as their export orientation may no longer be sustainable".

1"Won Crushes Yen as Dollar Substitute in Asian Rally" -Bloomberg; Brown and Lui
2"The Political Economy of Recovery and Rebalancing" - Econbrowser, Jeffrey Frieden

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