East Asian Economics

Professor Ronald I. McKinnon, of Stanford's Department of Economics, has pursued three research strands in the area of East Asian economics, with APARC's financial assistance.

The first strand focuses on Japan's economic troubles over the past decade. Professor McKinnon's 1997 book Dollar and Yen: Resolving Economic Conflict between the United States and Japan (written with Kenichi Ohno), dealt extensively with these troubles. In 1998, it was published and translated into Japanese. In addition to his op-ed contributions to various newspapers and magazines, Professor McKinnon's most recent research is "The Foreign Exchange Origins of Japan's Economic Slump and Low Interest Liquidity Trap", which the Bank of Japan published as a working paper, and which also appeared in The World Economy in 2000. The main theme in all of this work is that Japan's macroeconomic malaise has been imposed by external pressure to get the yen up, which then causes internal deflation with short-term interest rates near zero.

Professor McKinnon's second strand of research seeks to explain why, in noncrisis periods, East Asian countries (other than Japan) opt to peg their exchange rates closely to the U.S. dollar, and to align their price levels with those of the United States. This occurs even though, of the two, Japan is the more important trading country in the East Asian region. A paper addressing this topic, "The East Asian Dollar Standard: Life after Death?", was published in Economic Notes in February 2000. A follow-up working paper, "After the Crisis: The East Asian Dollar Standard Resurrected: An Interpretation of High Frequency Exchange Rate Pegging", was published in 2001 for the World Bank. The main theme in this paper is that the informal dollar standard for exchange rates has worked, and will work well, but the rules of the game could be improved to make the system more stable. The great crisis of 1997 and 1998 - when the currencies of Indonesia, Korea, Malaysia, the Philippines, and Thailand were all sharply devalued with the dollar standard temporarily suspended - arose primarily from failures in domestic bank regulation, rather than from the exchange rate regime itself. Currently, Professor McKinnon is working on a book, The East Asian Exchange Rate Dilemma and the World Dollar Standard, that pulls together his research on Japan, the large but depressed creditor country in the region, with the smaller debtor dollar bloc countries.

The third research strand follows China's remarkable progress in transitioning from a centrally planned, virtually closed economy in 1979 to a more liberal and open one in 2000. This research began in 1993 with the publication of the book The Order of Economic Liberalization: Financial Control in the Transition to a Market Economy, which was translated into Chinese in 1998 and has been widely distributed there. Professor McKinnon's most recent paper (presented in Beijing, Shanghai, and elsewhere) is "China's Financial Policies upon Accession to the WTO." The paper suggests that it is premature to remove controls over foreign capital outflows or inflows, or to allow foreign banks to compete with Chinese banks domestically, until domestic financial regulation and fiscal policy are substantially improved.