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

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  • Kawai, Masahiro
  • Takagi, Shinji

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.

Suggested Citation

  • Kawai, Masahiro & Takagi, Shinji, 2000. "Proposed strategy for a regional exchange rate arrangement in post-crisis East Asia," Policy Research Working Paper Series 2503, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2503
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    2. 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.
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    5. Tony Cavoli & Ramkishen S. Rajan, 2005. "Have Exchange Rate Regimes in Asia become More Flexible Post crisis? Re-VISITING the EVIDENCE," Finance Working Papers 22563, East Asian Bureau of Economic Research.
    6. Kwack, Sung Y., 2005. "Exchange rate and monetary regime options for regional cooperation in East Asia," Journal of Asian Economics, Elsevier, vol. 16(1), pages 57-75, February.
    7. Ogawa, Eiji & Shimizu, Junko, 2006. "Stabilization of effective exchange rates under common currency basket systems," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 590-611, December.
    8. Chandra, Vandana & Li, Ying & Osorio Rodarte, Israel, 2007. "Commodity Export Diversification in Rwanda - Many Export Discoveries with Little Scaling-Up," MPRA Paper 18556, University Library of Munich, Germany.
    9. Kim, Bong-Han & Min, Hong-Ghi & McDonald, Judy & Hwang, Young-Soon, 2012. "Yen-synchronization of floating East Asian currencies: A regime-switching regression model and micro-structural analysis," Journal of the Japanese and International Economies, Elsevier, vol. 26(2), pages 221-232.
    10. Jeon, Bang Nam & Zhang, Hongfang, 2007. "A currency union or an exchange rate union: evidence from Northeast Asia," MPRA Paper 36622, University Library of Munich, Germany, revised 01 Feb 2012.
    11. Kawai,Masahiro & Newfarmer,Richard S. & Schmukler,Sergio L., 2001. "Crisis and contagion in East Asia : nine lessons," Policy Research Working Paper Series 2610, The World Bank.
    12. Ramkishen Rajan & Reza Siregar & Graham Bird, 2003. "Examining the case for Reserve Pooling in East Asia: Empirical Analysis," Centre for International Economic Studies Working Papers 2003-23, University of Adelaide, Centre for International Economic Studies.
    13. Willie Lahari, 2011. "Exchange Rate Volatility and Choice of Anchor Currency - Prospects for a Melanesian Currency Union," Working Papers 1111, University of Otago, Department of Economics, revised Oct 2011.
    14. Kawai, Masahiro, 2005. "East Asian economic regionalism: progress and challenges," Journal of Asian Economics, Elsevier, vol. 16(1), pages 29-55, February.
    15. Kim, Bong-Han & Kim, Hyeongwoo & Min, Hong-Ghi, 2013. "Reassessing the link between the Japanese yen and emerging Asian currencies," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 306-326.
    16. Sheng, Andrew & Kwek, Kian-Teng & Cho, Cho-Wai, 2009. "A tale of Asian exchange rate management: Romance of the three currencies," Journal of Asian Economics, Elsevier, vol. 20(5), pages 519-535, September.
    17. Aminian, Nathalie, 2005. "Economic integration and prospects for regional monetary cooperation in East Asia," Structural Change and Economic Dynamics, Elsevier, vol. 16(1), pages 91-110, March.
    18. 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).
    19. repec:wsi:ceprxx:v:03:y:2014:i:02:n:s1793969014500095 is not listed on IDEAS
    20. 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.
    21. Watanabe, Shingo & Ogura, Masanobu, 2010. "How far apart are the two ACUs from each other? Asian currency unit and Asian currency union," Emerging Markets Review, Elsevier, vol. 11(2), pages 152-172, June.
    22. Eichengreen, Barry, 2002. "Lessons of the Euro for the Rest of the World," Institute of European Studies, Working Paper Series qt16g425jb, Institute of European Studies, UC Berkeley.
    23. Abhijit Sen Gupta & Amitendu Palit, 2008. "Feasibility of an Asian Currency Unit," Macroeconomics Working Papers 22164, East Asian Bureau of Economic Research.
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