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Financial Liberalization and Monetary Policy Cooperation in East Asia1

  • Hwee Kwan Chow

    (Singapore Management University)

  • Peter N. Kriz
  • Roberto S. Mariano
  • Augustine H. H. Tan

As the countries in East Asia embark on financial liberalization, a key issue that confronts policymakers is the greater complexity of risks that is injected into the financial system. In particular, capital account liberalization may potentially increase the vulnerability of individual countries to external financial shocks. This paper advocates the optimally cascading of financial liberalization that is consistent across three dimensions : extent of domestic financial liberalization; the degree of exchange rate flexibility; and the scope of capital account liberalization. Unless the process of liberalization is properly managed, it could provoke destabilizing capital flows and lead to volatile exchange rates. Smooth responses to fluctuating capital flows require accelerated institutional reforms in individual countries and an upgraded regional financial infrastructure. We argue that informal monetary arrangements, sequenced from simple to more intensive commitments, can go a long way in improving sovereign and regional institutions both to handle ongoing financial liberalization and to promote intra-regional currency stability.

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File URL: http://www.eaber.org/node/21916
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Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 21916.

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Date of creation: May 2007
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Handle: RePEc:eab:financ:21916
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

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  1. Menzie D. Chinn & Hiro Ito, 2002. "Capital Account Liberalization, Institutions and Financial Development: Cross Country Evidence," NBER Working Papers 8967, National Bureau of Economic Research, Inc.
  2. Hans Genberg, 2006. "Exchange-rate arrangements and financial integration in East Asia: on a collision course?," International Economics and Economic Policy, Springer, vol. 3(3), pages 359-377, December.
  3. Ronald McKinnon & Gunther Schnabl, 2003. "The East Asian Dollar Standard, Fear of Floating, and Original Sin," Working Papers 03001, Stanford University, Department of Economics.
  4. Benigno, Gianluca & Benigno, Pierpaolo, 2003. "Designing targeting rules for international monetary policy cooperation," Working Paper Series 0279, European Central Bank.
  5. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging-Market Countries," American Economic Review, American Economic Association, vol. 90(2), pages 105-109, May.
  6. Paul R. Krugman, 1988. "Target Zones and Exchange Rate Dynamics," NBER Working Papers 2481, National Bureau of Economic Research, Inc.
  7. Batini, Nicoletta & Harrison, Richard & Millard, Stephen P., 2003. "Monetary policy rules for an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11-12), pages 2059-2094, September.
  8. Obstfeld, Maurice & Shambaugh, Jay C. & Taylor, Alan M., 2004. "The Trilemma in History: Tradeoffs among Exchange Rates, Monetary Policies, and Capital Mobility," Center for International and Development Economics Research, Working Paper Series qt4rq9v2rb, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  9. Ross Levine, 2004. "Finance and Growth: Theory and Evidence," NBER Working Papers 10766, National Bureau of Economic Research, Inc.
  10. Woodford, Michael, 2000. "Optimal Monetary Policy Inertia," Seminar Papers 666, Stockholm University, Institute for International Economic Studies.
  11. Svensson, Lars E O, 1990. "Target Zones and Interest Rate Variability," CEPR Discussion Papers 372, C.E.P.R. Discussion Papers.
  12. Paul Burkett & Richard Lotspeich, 1993. "Review Article: Financial Liberalization, Development, and Marketization: A Review of McKinnon's The Order of Economic Liberalization: Financial Control in the Transition to a Market Economy (1991)," Comparative Economic Studies, Palgrave Macmillan, vol. 35(1), pages 59-84, April.
  13. Graciela Kaminsky & Sergio Schmukler, 2003. "Short-Run Pain, Long-Run Gain: The Effects of Financial Liberalization," NBER Working Papers 9787, National Bureau of Economic Research, Inc.
  14. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The Revived Bretton Woods System: The Effects of Periphery Intervention and Reserve Management on Interest Rates & Exchange Rates in Center Countries," NBER Working Papers 10332, National Bureau of Economic Research, Inc.
  15. Robert P. Flood & Andrew K. Rose, 1993. "Fixing Exchange Rates: A Virtual Quest for Fundamentals," NBER Working Papers 4503, National Bureau of Economic Research, Inc.
  16. Chow, Hwee Kwan & Kim, Yoonbai, 2003. "A common currency peg in East Asia? Perspectives from Western Europe," Journal of Macroeconomics, Elsevier, vol. 25(3), pages 331-350, September.
  17. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
  18. Reinhart, Carmen & Kaminsky, Graciela, 2008. "The center and the periphery: The globalization of financial turmoil," MPRA Paper 14100, University Library of Munich, Germany.
  19. Falvey, Rod & Kim, Cha Dong, 1992. "Timing and Sequencing Issues in Trade Liberalisation," Economic Journal, Royal Economic Society, vol. 102(413), pages 908-24, July.
  20. Raghuram G. Rajan, 2005. "Has Financial Development Made the World Riskier?," Working Papers id:248, eSocialSciences.
  21. Sid Ahmed Abdelkader, 1993. "Ronald I. McKinnon, The Order of Economic Liberalization : Financial Control in the Transition to a Market Economy," Revue Tiers Monde, Programme National Persée, vol. 34(136), pages 946-946.
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