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Monetary Policy in East Asia: Common Concerns

Author

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  • Marvin Goodfriend

    (Professor, Carnegie Mellon University (E-mail: marvingd@andrew.cmu.edu))

Abstract

The paper identifies and evaluates consequences for monetary policy of five features of East Asian development: export orientation, integrated regional trade, bank-dependent finance, the potential for persistent trade surpluses, and the aggressive accumulation of international reserves. The case for a flexible exchange rate is made in terms of the New Neoclassical Synthesis (NNS). NNS logic indicates why fluctuations in "export optimism" create problems for the sustainability of a fixed exchange rate. Cooperative credit policy in East Asia is discussed by analogy to a credit union. The paper outlines problems for monetary policy created by bank-dependent finance in East Asia. A two- country NNS model indicates that a revaluation of the RMB against the dollar is likely to exert little effect on the US trade deficit, although it should help control inflation in China. The paper argues that China can adopt a flexible exchange rate in a few years with modest reforms of its banking system. Finally, the paper considers various reasons for the accumulation of international reserves in East Asia.

Suggested Citation

  • Marvin Goodfriend, 2007. "Monetary Policy in East Asia: Common Concerns," IMES Discussion Paper Series 07-E-18, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:07-e-18
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    File URL: http://www.imes.boj.or.jp/research/papers/english/07-E-18.pdf
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    References listed on IDEAS

    as
    1. Patrick C. Higgins & Owen F. Humpage, 2005. "The Chinese renminbi: what’s real, what’s not," Economic Commentary, Federal Reserve Bank of Cleveland, issue Aug.
    2. Goodfriend, Marvin & McDermott, John, 1998. "Industrial Development and the Convergence Question," American Economic Review, American Economic Association, vol. 88(5), pages 1277-1289, December.
    3. Enrique Alberola & José María Serena, 2007. "Global financial integration, monetary policy and reserve accumulation. Assessing the limits in emerging economies," Working Papers 0706, Banco de España.
    4. Devereux, Michael B. & Genberg, Hans, 2007. "Currency appreciation and current account adjustment," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 570-586, June.
    5. George Soros, 1999. "The International Financial Crisis," Challenge, Taylor & Francis Journals, vol. 42(2), pages 58-76, March.
    6. 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.
    7. Hiroshi Fujiki & Akiko Terada-Hagiwara, 2007. "Financial Integration in East Asia," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 25(S1), pages 57-100, December.
    8. Maurice Obstfeld & Kenneth Rogoff, 1995. "The Mirage of Fixed Exchange Rates," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 73-96, Fall.
    9. Barry Eichengreen, 2006. "Global Imbalances and the Asian Economies: Implications for Regional Cooperation," Working Papers on Regional Economic Integration 4, Asian Development Bank.
    10. Husain, Aasim M. & Mody, Ashoka & Rogoff, Kenneth S., 2005. "Exchange rate regime durability and performance in developing versus advanced economies," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 35-64, January.
    11. Bank for International Settlements, 2006. "Developing corporate bond markets in Asia," BIS Papers, Bank for International Settlements, number 26, June.
    12. repec:bla:ausecr:v:40:y:2007:i:1:p:3-23 is not listed on IDEAS
    13. Bank for International Settlements, 2006. "Monetary policy in Asia: approaches and implementation," BIS Papers, Bank for International Settlements, number 31, June.
    14. Marvin Goodfriend & Eswar Prasad, 2009. "A Framework for Independent Monetary Policy in China," Chapters, in: Gill Hammond & Ravi Kanbur & Eswar Prasad (ed.), Monetary Policy Frameworks for Emerging Markets, chapter 8, Edward Elgar Publishing.
    15. Bank for International Settlements, 2006. "The banking system in emerging economies: how much progress has been made?," BIS Papers, Bank for International Settlements, number 28, June.
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    17. Goodfriend, Marvin, 2007. "International Adjustment in the New Neoclassical Synthesis," Kiel Working Papers 1345, Kiel Institute for the World Economy (IfW Kiel).
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    Cited by:

    1. Robert Lafrance, 2008. "China's Exchange Rate Policy: A Survey of the Literature," Discussion Papers 08-5, Bank of Canada.

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    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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