Flexible BBC Exchange Rate System and Exchange Rate Cooperation in East Asia
AbstractIn order to prevent competitive depreciations, excessive inflows of foreign capital and crisis contagion in the region, cooperation in exchange rate and monetary policy is very desirable, considering the fact that countries in East Asia have high trade dependence among them and similar trade patterns with each other. The BBC system proposed will be examined and the new BBC system will be suggested. The BBC system is desirable as a new exchange rate system in Korea. Singapore has been successful with the BBC system since the early 1980s. It would be more desirable that East Asia adopt the flexible BBC (basket, band, crawl) exchange rate system jointly. Participating countries of East Asia including Japan link their exchange rates to their currency basket (ACU) with bands and the ACU is linked to the basket of the dollar and euro by a regional agency. It will stabilize real effective exchange rates of East Asian countries and reduce excessive short term capital flows into developing East Asian countries. In addition to the above flexible BBC exchange rate system the U.S. and Japan can fix the yen/dollar exchange rate within a band in the short- and medium-run and fix the rate in the long-term. It will further reduce excessive capital inflows into developing countries in the region. Without stabilizing the yen/dollar exchange rate, interest rates of Japan will continue to be lower than those of the U.S. and emerging East Asian countries, and yen-carry trade and excessive capital inflows in developing East Asia will appear when the expected exchange rate of the yen is uncertain or weak. And sudden outflow of short-term capital will follow later. The ACU is linked to the basket of the dollar and yen, and participating countries in the region link their exchange rates to the ACU with bands. The yen is included in the outside basket, but not in the regional basket in this alternative scheme. This scheme will stabilize exchange rates of emerging East Asian countries against the yen and dollar more effectively. When they crawl their central rates within bands, real effective exchange rates (REERs) using unit labor cost indices need to be used to keep their export competitiveness constant. Sound and consistent economic policies are essential for success of the BBC system. Singapore experiences with the BBC system provide good lessons. Prudential fiscal policy, flexible prices of goods and productive factors, proper interest policy and effective use of foreign reserves are needed. Joint or independent capital control could be helpful in the face of excessive capital inflows. Other measures for financial cooperation are discussed also.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by East Asian Bureau of Economic Research in its series Trade Working Papers with number 21802.
Date of creation: Jul 2008
Date of revision:
Contact details of provider:
Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
Web page: http://www.eaber.org
More information through EDIRC
exchange rate cooperation; asset inflation; currency basket; yen-carry trade;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Aasim M. Husain & Ashoka Mody & Nienke Oomes & Robin Brooks & Kenneth Rogoff, 2003.
"Evolution and Performance of Exchange Rate Regimes,"
IMF Working Papers
03/243, International Monetary Fund.
- Robin Brooks & Kenneth Rogoff & Ashoka Mody & Nienke Oomes & Aasim M. Husain, 2004. "Evolution and Performance of Exchange Rate Regimes," IMF Occasional Papers 229, International Monetary Fund.
- Reinhart, Carmen & Calvo, Guillermo, 2002.
"Fear of floating,"
14000, University Library of Munich, Germany.
- Kawai, Masahiro, 2002. "Exchange Rate Arrangements in East Asia: Lessons from the 1997-98 Currency Crisis," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(S1), pages 167-204, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shiro Armstrong).
If references are entirely missing, you can add them using this form.