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Regional Monetary Units for East Asia: Lessons from Europe

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  • Girardin Eric
  • Steinherr Alfred

Abstract

This paper reports the European experience with a basket currency, the ECU. The ECU was initially introduced as a reference unit and later became the anchor of the European Monetary System. Public policy was complemented by private sector initiatives and use of the ECU for denomination of financial instruments. In practice, it turned out that a basket currency entails considerable unexpected technical complexities. There are no iron-clad economic principles and therefore there is some room for political considerations. In Europe three criteria were used for determining the weights: GDP shares, international trade shares, and financial market indicators. In addition, weights will change with exchange rate movements. Appreciating currencies will experience increasing weights and depreciating currencies decreasing weights. This may require a correction mechanism for political acceptability. In Europe, weights were rescaled by political authorities every five years. From an economic view point, weights depend critically on the purpose of the basket currency: is it a reference indicator, is it a currency for international transactions, or is it a parallel currency? Thus, before weights are to be discussed a clear vision of the role of the basket currency would be desirable. The vastly different growth performance among Asian economies also suggests a preference to forward rather than backward-looking measure. Turning then to the different functions of a basket currency, the use of basket currencies as a divergence indicator, or as a financial instrument in regional financial markets before elaborating a road map for the development of a basket currency in Asia is examined.[ DP 116]

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Bibliographic Info

Paper provided by eSocialSciences in its series Working Papers with number id:1972.

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Date of creation: May 2009
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Handle: RePEc:ess:wpaper:id:1972

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Web page: http://www.esocialsciences.org

Related research

Keywords: Currency; Fixed Currency Unit; Monetary Unit; Basket Currency; Fixed Exchange Rate; Asian Currency Unit; European Currency Unit; Parallel Currency; Hard Currency Unit; Divergence Indicator; Short Maturities; Long Maturities; Cost-Benefit Analysis; Zero-Sum Game;

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References

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  1. Eric Girardin, 2004. "Regime-dependent synchronization of growth cycles between Japan and East Asia," Money Macro and Finance (MMF) Research Group Conference 2004, Money Macro and Finance Research Group 66, Money Macro and Finance Research Group.
  2. Haruhiko Kuroda & Masahiro Kawai, 2002. "Strengthening Regional Financial Cooperation in East Asia," Asia Pacific Economic Papers, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University 332, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
  3. Masahiro Kawai & Shinji Takagi, 2005. "Strategy for a Regional Exchange Rate Arrangement in East Asia: Analysis, Review and Proposal," Global Economic Review, Taylor & Francis Journals, Taylor & Francis Journals, vol. 34(1), pages 21-64.
  4. Barry Eichengreen & Pipat Luengnaruemitchai, 2004. "Why Doesn't Asia Have Bigger Bond Markets?," NBER Working Papers 10576, National Bureau of Economic Research, Inc.
  5. Clifford R Dammers & Robert N McCauley, 2006. "Basket weaving: the euromarket experience with basket currency bonds," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, March.
  6. Steinherr, Alfred & Cisotta, Alessandro & Klar, Erik & Sehovic, Kenan, 2006. "Liberalizing Cross-Border Capital Flows: How Effective Are Institutional Arrangements against Crisis in Southeast Asia," Working Papers on Regional Economic Integration, Asian Development Bank 6, Asian Development Bank.
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Cited by:
  1. Gupta, Abhijit Sen, 2012. "Exchange Rate Coordination in Asia: Evidence using the Asian Currency Unit," ADBI Working Papers, Asian Development Bank Institute 356, Asian Development Bank Institute.
  2. Zhang, Zhichao & Shi, Nan & Zhang, Xiaoli, 2011. "China’s new exchange rate regime, optimal basket currency and currency diversification," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 19/2011, Bank of Finland, Institute for Economies in Transition.

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