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Designing Appropriate Exchange Rate Regimes for East Asia: Inflation Targeting and Monetary Policy Rules

  • Tony Cavoli

    ()

    (School of Economics, University of Adelaide, Australia)

  • Ramkishen Rajan

    ()

    (School of Economics, University of Adelaide, Australia)

While favoring relatively more flexible regimes, emerging economies in East Asia and elsewhere appear to heavily manage their currencies despite being officially described as “floaters”. In other words, revealed preferences of regional monetary authorities appear to indicate a high degree of “fear of floating”. The paper first explores the reasons for this fear of floating. It then goes on to examine the case for and operational mechanics behind an open inflation targeting regime which has increasingly been advocated for small and open economies in East Asia and elsewhere. The paper also attempts a reconciliation between the discussion of analytics behind open economy inflation targeting and its implications for exchange rate design, on the one hand, and actual exchange rate ongoings in East Asia, on the other.

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Paper provided by University of Adelaide, Centre for International Economic Studies in its series Centre for International Economic Studies Working Papers with number 2003-09.

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Length: 57 pages
Date of creation: Apr 2003
Date of revision:
Handle: RePEc:adl:cieswp:2003-09
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  1. Reinhart, Carmen, 2000. "The mirage of floating exchange rates," MPRA Paper 13736, University Library of Munich, Germany.
  2. Stephen G. Cecchetti & Hans Genberg & Sushil Wadhwani, 2002. "Asset Prices in a Flexible Inflation Targeting Framework," NBER Working Papers 8970, National Bureau of Economic Research, Inc.
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  4. Svensson, Lars E O, 1998. "Open-Economy Inflation Targeting," CEPR Discussion Papers 1989, C.E.P.R. Discussion Papers.
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  8. Reinhart, Carmen & Calvo, Guillermo, 2001. "Fixing for your life," MPRA Paper 13873, University Library of Munich, Germany.
  9. Amartya Lahiri & Carlos A. Végh, 2002. "Living with the Fear of Floating: An Optimal Policy Perspective," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 663-704 National Bureau of Economic Research, Inc.
  10. Carmen M. Reinhart, 2000. "Mirage of Floating Exchange Rates," American Economic Review, American Economic Association, vol. 90(2), pages 65-70, May.
  11. G. Bird & R. Rajan, 2001. "Would International Currency Taxation and Currency Stabilisation in Developing Countries?," Journal of Development Studies, Taylor & Francis Journals, vol. 37(3), pages 21-38.
  12. Taylor, John B., 1998. "The Robustness and Efficiency of Monetary Policy Rules as Guidelines for Interest Rate Setting by the European Central Bank," Seminar Papers 649, Stockholm University, Institute for International Economic Studies.
  13. McKenzie, Michael D, 1999. " The Impact of Exchange Rate Volatility on International Trade Flows," Journal of Economic Surveys, Wiley Blackwell, vol. 13(1), pages 71-106, February.
  14. Aaron Tornell & Andres Velasco, 1995. "Fixed versus Flexible Exchange Rates: Which Provides More Fiscal Discipline?," NBER Working Papers 5108, National Bureau of Economic Research, Inc.
  15. Graham Bird & Ramkishen Rajan, 2002. "Optimal currency baskets and the third currency phenomenon: exchange rate policy in Southeast Asia," Journal of International Development, John Wiley & Sons, Ltd., vol. 14(8), pages 1053-1073.
  16. Thomas D. Willett, 2002. "Fear of Floating Needn't Imply Fixed Rates: Feasible Options for Intermediate Exchange Rate Regimes," Claremont Colleges Working Papers 2002-18, Claremont Colleges.
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  18. Reza Siregar & Ramkishen Rajan, 2003. "Exchange Rate Policy and Foreign Exchange Reserves Management in Indonesia in the Context of East Asian Monetary Regionalism," Centre for International Economic Studies Working Papers 2003-02, University of Adelaide, Centre for International Economic Studies.
  19. Bordo, Michael D & Jeanne, Olivier, 2002. "Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?," International Finance, Wiley Blackwell, vol. 5(2), pages 139-64, Summer.
  20. Ramkishen Rajan, 2002. "International Financial Liberalisation in Developing Countries: Lessons from Recent Experiences," Centre for International Economic Studies Working Papers 2002-20, University of Adelaide, Centre for International Economic Studies.
  21. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
  22. Philip Lowe & Luci Ellis, 1997. "The Smoothing of Official Interest Rates," RBA Annual Conference Volume, in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia.
  23. Siklos, Pierre L, 2000. "Is the MCI a Useful Signal of Monetary Policy Conditions? An Empirical Investigation," International Finance, Wiley Blackwell, vol. 3(3), pages 413-37, November.
  24. Ramkishen S. Rajan & Reza Siregar, 2002. "Choice of Exchange Rate Regime: Currency Board (Hong Kong) or Monitoring Band (Singapore)?," Australian Economic Papers, Wiley Blackwell, vol. 41(4), pages 538-556, December.
  25. Wei, Shang-Jin, 1999. "Currency hedging and goods trade," European Economic Review, Elsevier, vol. 43(7), pages 1371-1394, June.
  26. Eichengreen, Barry, 2001. "What problems can dollarization solve?," Journal of Policy Modeling, Elsevier, vol. 23(3), pages 267-277, April.
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