Toward An East Asian Exchange Rate Regime

East Asian exchange rates have become a global flashpoint. U.S. policymakers blame artificially low Asian currency values for global imbalances, including America's ballooning current account deficit. The solution, they argue, lies in some combination of greater exchange rate flexibility and the appreciation of Asian currencies against the dollar. Asian officials recognize the need to let their exchange rates rise, but they fear that would hamper growth and cut sharply into the value of their dollar reserves. Toward an East Asian Exchange Rate Regime offers a timely and comprehensive analysis of the resulting debates, drawing on expertise from China, Japan, South Korea, and the United States. The introduction reviews the issues at stake, sketches a variety of proposed exchange rate regimes, and discusses comparisons between East Asia and the West. Subsequent chapters examine the connection between global financial imbalances and East Asian monetary cooperation, China's potential role in regional coordination, the relationship between monetary and trade integration, and different paths toward regional cooperation. Authoritative yet concise, this is an essential primer on East Asian monetary integration. Contributors include Gongpil Choi (Korean Institute of Finance, Federal Reserve Bank of San Francisco), Masahiro Kawai (University of Tokyo, Asian Development Bank), Kwanho Shin (Korea University), Yunjong Wang (SK Institute), Masaru Yoshitomi (RIETI,Tokyo), and Yongding Yu (Chinese Academy of Social Sciences).

There is a deepening debate in East Asia about the prospects for common exchange rate arrangements, even including the formation of a common currency in the longer term. This raises a complex set of issues and this volume provides a detailed yet comprehensive examination of key issues in the debate. It looks, for example, at the nature and extent of linkages in East Asia, in terms of trade and foreign investment, finance, labour, and consumption, investment and output. It examines how the exchange rate affects various aspects of economies. And it critically analyzes various proposals for currency regimes for the region, including floating exchange rates, basket pegs, and currency union.

Towards Monetary and Financial Integration in East Asia is an important book. East Asia, led by China, has been and will continue to be the largest, most rapidly growing region in the world. Major global imbalances persist, with East Asia in large surplus. Yet East Asian financial and monetary integration is only in the early stages of what will necessarily be a long-run process. These 14 essays by different authors address, in six Parts, fundamental long-run issues and prospects. These include the development of a regional financial architecture, liquidity provision and crisis management, surveillance mechanisms, exchange rate arrangements, currency baskets, an Asian Currency Unit, and ultimately even a single currency. The implications of the rise of China and the role of Japan underlie much of these analyses. However imperfect, the EU is the dominant relevant experience for East Asian financial and monetary integration. It is important to understand, as the authors do, that it took 47 years from the EU s nascent founding to the establishment of the euro, and that economic integration has preceded political integration. This book importantly addresses such basic issues in this time frame and with an appreciation of the political economy difficulties of financial integration. Hugh Patrick, Columbia University, US The book edited by Professors Hamada, Reszat, and Volz gives a comprehensive overview of the current status and challenges of economic integration in East Asia. Monetary and financial integration in East Asia has proceeded gradually but steadily since the Asian financial crisis of 1997 98. The book is an authoritative cutting-edge collection of papers in respective topics which brings the reader to the frontier of the literature. Takatoshi Ito, University of Tokyo, Japan This indispensable book provides a comprehensive analysis of monetary and financial integration in East Asia. It assesses the steps already taken toward financial integration and brings forward different proposals for future exchange rate arrangements in what has now become the world s most dynamic region. With contributions from distinguished experts this timely book evaluates the economic and politico-economic arguments and conditions for monetary and financial integration in East Asia. It explores how and to what extent the countries of the region can integrate despite their heterogeneity and their underlying political tensions. Drawing on the European experiences, this book analyzes the economic logic of monetary and financial integration in East Asia and its political feasibility. This invaluable broad analysis will be of interest to academic researchers, students, policy-makers and professional economists working on matters of international economic cooperation, common currency areas, international open economy macroeconomics, and East Asian integration.

A coordinated action by East Asian countries to stabilize their currencies against a common basket of major currencies (broadly representative of their average structure of trade and foreign direct investment) would help stabilize both intraregional exchange rates and effective exchange rates, in a way consistent with the medium-term objective of promoting trade investment and growth in the region.

A coordinated action by East Asian countries to stabilize their currencies against a common basket of major currencies (broadly representative of their average structure of trade and foreign direct investment) would help stabilize both intra-regional exchange rates and effective exchange rates - in a way consistent with the medium-term objective of promoting trade, investment, and growth in the region. After discussing major conceptual and empirical issues relevant to the exchange rate policies of East Asian countries, Kawai and Takagi propose a regional exchange rate arrangement designed to promote intraregional exchange rate stability and regional economic growth. They argue that: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.Given the high share of intraregional trade and the similarity of trade composition in East Asia, exchange rate policy should be directed toward maintaining intraregional exchange rate stability, to promote trade, investment, and economic growth.The current policy of maintaining exchange rate stability against the U.S. dollar as an informal, uncoordinated mechanism for ensuring intraregional exchange rate stability is suboptimal. A pragmatic policy option - conducive to a more robust framework for cooperation in monetary and exchange rate policy - would be a coordinated action to shift the target of nominal exchange rate stability to a basket of tripolar 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 a 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.This paper - a product of the Office of the Chief Economist, East Asia and Pacific Region - is part of a larger effort in the region to study financial market development, capital flows, and exchange rate arrangements in East Asia.

The global financial crisis and the Eurozone crisis have led to a profound rethink in East Asia about the international monetary system and regional monetary and financial integration. After the East Asian crisis of 1997, deeper regional cooperation was seen as the way to avoid reliance on the IMF and the rest of the world. Steps were taken, but they were limited because of disagreements reflecting regional rivalries. Still, integration into the global financial system and Europe's regional process were seen as objectives to be adapted to East Asia, as detailed in an overview chapter. The crises have shaken this strategy but also revealed the pre-existing deep disagreements. This book presents contributions by scholars from different countries. Each one was invited to describe the vision of their policymakers. The traidtional rivalry between China and Japan, the region's largest economies, reveals Chinese confidence into its rising power and Japanese growing doubts about its ability to weigh on the debate. For opposite reasons, both display a declining interest into regional cooperation. Korea and the ASEAN countries do not wish to choose between the regional powers but remain attached to regional cooperation and integration. They look for pragmatic solutions that recognize the value-chain characteristic of trade. Additional contributions by US and European scholars provide evaluations of the global and Eurozone crises and of their relevance for East Asian integration.

This book explores the opportunities and limits of currency cooperation in East Asia. Currency issues play an important role in the region. The Asian crisis of the late 90s was rooted in deficient currency arrangements. The Chinese RMB is not freely convertible yet, but policymakers in China nevertheless aim for a more international role of the Chinese currency. The recent change of direction in Japanese monetary policy caused a drastic depreciation of the Yen and led to warnings against a possible “currency war”, thus demonstrating that currency issues can also easily lead to political frictions. Most trade in and with the East Asian zone on the other hand is still conducted in US $. Against this background different modes of currency cooperation serve the goal of smoothing exchange rate fluctuations and capital flows. They are an important element to promote financial stability and to reduce the transaction cost for foreign trade or investment. The contributions of this book analyze the environment and design of currency cooperation in East Asia and their effects from a macro-and microeconomic viewpoint.

The exchange rate is a crucial variable linking a nation's domestic economy to the international market. Thus choice of an exchange rate regime is a central component in the economic policy of developing countries and a key factor affecting economic growth. Historically, most developing nations have employed strict exchange rate controls and heavy protection of domestic industry-policies now thought to be at odds with sustainable and desirable rates of economic growth. By contrast, many East Asian nations maintained exchange rate regimes designed to achieve an attractive climate for exports and an "outer-oriented" development strategy. The result has been rapid and consistent economic growth over the past few decades. Changes in Exchange Rates in Rapidly Developing Countries explores the impact of such diverse exchange control regimes in both historical and regional contexts, focusing particular attention on East Asia. This comprehensive, carefully researched volume will surely become a standard reference for scholars and policymakers.