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Monetary Policy in East Asia: Common Concerns

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  • Marvin Goodfriend

    (Carnegie Mellon University (E-mail: marvingd@ andrew.cmu.edu))

Abstract

The paper identifies and evaluates consequences for monetary policy of five features of East Asian development: export orientation, integrated regional trade, bank-dependent finance, the potential for persistent trade surpluses, and the aggressive accumulation of international reserves. The case for a flexible exchange rate is made in terms of the New Neoclassical Synthesis (NNS). NNS logic indicates why fluctuations in gexport optimismh create problems for the sustainability of a fixed exchange rate. Cooperative credit policy in East Asia is discussed by analogy to a credit union. The paper outlines problems for monetary policy created by bank-dependent finance in East Asia. A two-country NNS model indicates that a revaluation of the renminbi against the U.S. dollar is likely to exert little effect on the U.S. trade deficit, although it should help control inflation in China. The paper argues that China can adopt a flexible exchange rate in a few years with modest reforms of its banking system. Finally, the paper considers various reasons for the accumulation of international reserves in East Asia.

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Bibliographic Info

Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

Volume (Year): 25 (2007)
Issue (Month): S1 (December)
Pages: 207-232

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Handle: RePEc:ime:imemes:v:25:y:2007:i:s1:p:207-232

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Keywords: East Asia; Monetary policy; Banking policy; Exchange rates; Trade balance; International reserves;

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  1. Marvin Goodfriend & Eswar Prasad, 2006. "A Framework for Independent Monetary Policy in China," IMF Working Papers 06/111, International Monetary Fund.
  2. Enrique Alberola & José María Serena, 2007. "Global financial integration, monetary policy and reserve accumulation. Assessing the limits in emerging economies," Banco de Espa�a Working Papers 0706, Banco de Espa�a.
  3. Michael B. Devereux & Hans Genberg, 2006. "Currency Appreciation and Current Account Adjustment," Working Papers 172006, Hong Kong Institute for Monetary Research.
  4. Hiroshi Fujiki & Akiko Terada-Hagiwara, 2007. "Financial Integration in East Asia," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 25(S1), pages 57-100, December.
  5. Patrick Higgins & Owen F. Humpage, 2005. "The Chinese renminbi: what’s real, what’s not," Economic Commentary, Federal Reserve Bank of Cleveland, issue Aug.
  6. Goodfriend, Marvin & McDermott, John, 1998. "Industrial Development and the Convergence Question," American Economic Review, American Economic Association, vol. 88(5), pages 1277-89, December.
  7. Hans Genberg, 2006. "Exchange-Rate Arrangements an Financial Integration in East Asia: On a Collision Course?," Working Papers 122, Oesterreichische Nationalbank (Austrian Central Bank).
  8. Matthew Higgins & Thomas Klitgaard, 2004. "Reserve accumulation: implications for global capital flows and financial markets," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 10(Sep).
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