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Proposed strategy for a regional exchange rate arrangement in post-crisis East Asia

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Author Info
Kawai, Masahiro
Takagi, Shinji

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Abstract

After discussing major conceptual, and empirical issues relevant to the exchange rate policies of East Asian countries, the authors propose a regional exchange rate arrangement designed to promote intra-regional exchange rate stability, and regional economic growth. They argue that: 1) For developing countries, exchange rate volatility tends to significantly hurt trade and investment, making it inadvisable to adopt a system of freely floating exchange rates. 2) Given the high share of intra-regional trade, and the similarity of trade composition in East Asia, exchange rate policy should be directed toward maintaining intra-regional exchange rate stability, to promote trade, investment, and economic growth. 3) the current policy of maintaining exchange rate stability against U.S. dollar as an informal, uncoordinated mechanisms for ensuring intra-regional exchange rate stability is sub-optimal. A pragmatic policy option - conducive to a more robust framework for cooperation in monetary, and exchange rate policy - wold be a coordinated action to shift the target of nominal exchange rate stability, to a basket of tri-polar currencies (the U.S. dollar, the Japanese yen, and the Euro). This alternative would better reflect the region's diverse structure of trade, and foreign direct investment.The authors envision no rigid peg. Instead, at least initially, each country could choose its own formal exchange rate arrangement - be it currency board, a crawling peg, or a basket peg with wide margins. At times of crisis, the peg might be temporarily suspended, subject to the rule that the exchange rate would be restored to the original level as soon as practical. Only in extreme circumstances, would the level be adjusted to reflect new equilibrium conditions.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2503.

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Date of creation: 31 Dec 2000
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Handle: RePEc:wbk:wbrwps:2503

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Keywords: Environmental Economics&Policies; Economic Stabilization; Macroeconomic Management; Fiscal&Monetary Policy; Economic Theory&Research;

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References listed on IDEAS
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.:
  1. Kawai, Masahiro & Akiyama, Shigeru, 2000. "Implications of the currency crisis for exchange rate arrangements in emerging East Asia," Policy Research Working Paper Series 2502, The World Bank. [Downloadable!]
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  3. Clarida, Richard & Gali, Jordi, 1994. "Sources of real exchange-rate fluctuations: How important are nominal shocks?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 1-56, December. [Downloadable!] (restricted)
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  4. Eiji Ogawa & Takatoshi Ito, 2000. "On the Desirability of a Regional Basket Currency Arrangement," NBER Working Papers 8002, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Gagnon, Joseph E., 1993. "Exchange rate variability and the level of international trade," Journal of International Economics, Elsevier, vol. 34(3-4), pages 269-287, May. [Downloadable!] (restricted)
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  14. Kawai, Masahiro & Akiyama, Shigeru, 1998. "The Role of Nominal Anchor Currencies in Exchange Rate Arrangements," Journal of the Japanese and International Economies, Elsevier, vol. 12(4), pages 334-387, December. [Downloadable!] (restricted)
  15. Ito, Takatoshi & Ogawa, Eiji & Sasaki, Yuri Nagataki, 1998. "How Did the Dollar Peg Fail in Asia?," Journal of the Japanese and International Economies, Elsevier, vol. 12(4), pages 256-304, December. [Downloadable!] (restricted)
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  16. Williamson, John, 1982. "A survey of the literature on the optimal peg," Journal of Development Economics, Elsevier, vol. 11(1), pages 39-61, August. [Downloadable!] (restricted)
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  19. Esteban Jadresic & Paul R. Masson & Paolo Mauro & Michael Mussa & Alexander K. Swoboda & Andrew Berg, 2000. "Exchange Rate Regimes in an Increasingly Integrated World Economy," IMF Occasional Papers 193, International Monetary Fund. [Downloadable!]
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  24. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September. [Downloadable!] (restricted)
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  25. Atish R. Ghosh & Anne-Marie Gulde & Jonathan D. Ostry & Holger C. Wolf, 1997. "Does The Nominal Exchange Rate Regime Matter?," Working Papers 97-09, New York University, Leonard N. Stern School of Business, Department of Economics.
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  26. Agnes Benassy-Quere & Lionel Fontagne & Amina Lahreche-Revil, 1999. "Exchange rate strategies in the competition for attracting FDI," Working Papers 1999-16, CEPII research center. [Downloadable!]
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  27. Flood, Robert P & Rose, Andrew K, 1999. "Understanding Exchange Rate Volatility without the Contrivance of Macroeconomics," Economic Journal, Royal Economic Society, vol. 109(459), pages F660-72, November. [Downloadable!] (restricted)
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  28. Masahiro Kawai, 1998. "The East Asian Currency Crisis: Causes And Lessons," Contemporary Economic Policy, Western Economic Association International, vol. 16(2), pages 157-172, 04. [Downloadable!] (restricted)
  29. Takagi, Shinji, 1988. "A basket peg policy: Operational issues for developing countries," World Development, Elsevier, vol. 16(2), pages 271-279, February. [Downloadable!] (restricted)
  30. Olivier Jeanne & Andrew K. Rose, 1999. "Noise Trading and Exchange Rate Regimes," NBER Working Papers 7104, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  31. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fixing for Your Life," NBER Working Papers 8006, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  32. Tamim Bayoumi & Paolo Mauro, 2001. "The Suitability of ASEAN for a Regional Currency Arrangement," The World Economy, Blackwell Publishing, vol. 24(7), pages 933-954, 07. [Downloadable!] (restricted)
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  33. Jeffrey A. Frankel, 1999. "No Single Currency Regime is Right for All Countries or At All Times," NBER Working Papers 7338, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  34. Shinji Takagi, 1999. "The Yen and Its East Asian Neighbors 1980-1995: Cooperation or Competition?," NBER Chapters, in: Changes in Exchange Rates in Rapidly Development Countries: Theory, Practice, and Policy Issues (NBER-EASE volume 7), pages 185-210 National Bureau of Economic Research, Inc. [Downloadable!]
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Full references

Cited by:
(explanations, 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.)

  1. Kawai, Masahiro & Newfarmer, Richard & Schmukler, Sergio, 2001. "Crisis and contagion in East Asia : nine lessons," Policy Research Working Paper Series 2610, The World Bank. [Downloadable!]
  2. OGAWA Eiji & SHIMIZU Junko, 2007. "Progress toward a Common Currency Basket System in East Asia," Discussion papers 07002, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
  3. Abhijit Sen Gupta & Amitendu Palit, 2008. "Feasibility of an Asian Currency Unit," Indian Council for Research on International Economic Relations, New Delhi Working Papers 208, Indian Council for Research on International Economic Relations, New Delhi, India. [Downloadable!]
  4. Kuroda, 2002. "Stregthening Regional Financial Cooperation in East Asia," Finance Working Papers 418, East Asian Bureau of Economic Research. [Downloadable!]
  5. Haruhiko Kuroda & Masahiro Kawai, 2003. "Strengthening Regional Financial Cooperation in East Asia," Finance Working Papers 483, East Asian Bureau of Economic Research. [Downloadable!]
  6. Lamberte, Mario B. & Milo, Melanie S. & Pontines, Victor, 2001. "NO to ¥E$? Enhancing Economic Integration in East Asia through Closer Monetary Cooperation," Discussion Papers DP 2001-16, Philippine Institute for Development Studies. [Downloadable!]
  7. Masahiro Kawai & Richard Newfarmer & Sergio L. Schmukler, 2003. "Financial Crises: Nine Lessons From East Asia," Finance Working Papers 482, East Asian Bureau of Economic Research. [Downloadable!]
  8. Monzur Hossain, 2008. "Exchange Rate Regime Transition Dynamics In East Asia," AIUB Bus Econ Working Paper Series AIUB-BUS-ECON-2008-03, American International University-Bangladesh, Office of Research and Publications (ORP), revised Jan 2008. [Downloadable!]
  9. Eiji Ogawa & Junko Shimizu, 2006. "Stabilization of Effective Exchange Rates Under Common Currency Basket Systems," NBER Working Papers 12198, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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