![Sample our Area Studies journals, sign in here to start your access, latest two full volumes FREE to you for 14 days]({"type":"image" , "src" : "/sda/5922/TOC-Subject-Sample-2021-Area-Studies.jpg"})
ABSTRACT
This paper re-assesses the prospects for greater exchange rate cooperation in East Asia in the wake of the Asian financial crisis of 1997–8. The crisis highlighted the inability of unilateral exchange rate mechanisms to deal adequately with the inflow of foreign capital and the absence of a common defensive mechanism to deal with speculative movements in exchange rates. Since 1997 there have been a number of initiatives to enhance monetary cooperation in the region including options for a common exchange rate system. We find that whilst a common monetary and exchange rate policy in East Asia is unlikely in the foreseeable future, until the net economic benefits of giving up unilateral exchange rate regimes are more apparent, a good case can be made for continuing to talk about such arrangements. In the early stages the prerequisites for exchange rate cooperation are not as demanding as for full monetary union, provided sufficient flexibility is built-in. Of the available options a solution along the lines of the former European Exchange Rate Mechanism might be politically the most appealing if the arrangements are flexible enough to leave countries initially with sufficient independence in macroeconomic policy, and it can build on European experience.
Acknowledgements
I would like to thank the Staff of the Regional Economic Monitoring Unit at the Asian Development Bank in Manila for their comments on an earlier draft whilst I was a Visiting Research Fellow in 2002, and the Economics Department at the University of Nottingham for giving me the time and space to complete the work as a Visiting Researcher. The usual disclaimer applies. An anonymous referee also suggested some very helpful revisions.
Notes
* signifies significance at the five per cent probability level
** at one per cent.
1. For recent attempts to classify exchange rate regimes and go beyond the official designations of national governments and the International Monetary Fund, especially those in the intermediate zone between clean floating and a hard peg, see CitationNitithanprapas & Willett (2002).
2. Singapore's rather unusual, but highly successful, foreign exchange rate regime and monetary policy is explained in Monetary Authority of Singapore (2000). It is probably more accurate to describe the Singapore regime as a monitoring band as opposed to a more conventional crawling band since neither the central parity nor the bandwidth are completely fixed but are periodically reviewed to prevent misalignment and there is no obligation to defend the edges of the band. See CitationRamkishen & Siregar (2002) and CitationWilliamson (1998b).
3. Note that the standard deviation used in and should only be seen as a crude measure of variation since it is inappropriate where there are trends in the data, as in the case of crawling pegs or frequently changed adjustable pegs. See CitationNitithanprapas & Willett (2002).
4. Although, as CitationNicolas (1999) has pointed out, the dollar peg was good for the Asian ‘miracle’ between 1985 and 1995 insofar as the stability it produced within a climate of unilateral liberalization and open regionalism increased trade and investment, and encouraged the relocation of production from Japan as yen appreciation made it cheaper to produce abroad in the ‘dollar zone’.
5. It is actually quite difficult to find hard evidence of a long-term negative relationship between the real trade balance and real exchange rate appreciation for East Asian countries (CitationWilson, 2001).
6. The 10 members of ASEAN together with Korea, Japan and China.
7. Under a ‘currency interchangeability arrangement’ Brunei and Singapore accept each other's currency as ‘customary tender’ and exchange it at par into their own currency, periodically repatriating the accumulated stock of notes back to the country of origin. In essence, the arrangement is a currency union characterized by a one-for-one exchange rate and a joint managed floating exchange rate mechanism. There is no formal cooperative support mechanism but in practice a joint monetary policy is conducted by the MAS. See CitationChan & Ngiam (1992).
8. Because exchange rate cooperation lies along the broader spectrum of international policy coordination it is not self-evident that the coordination of exchange rates among EA countries would increase their joint or individual welfare. The theoretical and empirical literature is still ambiguous on this. For a review of these issues, see CitationHamada & Kawai (1997) and for East Asian monetary cooperation, CitationWilson (2004).
9. See, for example, CitationAthukorala & Warr (2002) and CitationChan et al. (2001).
10. For recent discussions of this, see CitationAriff (2001), CitationChaipravat (2001) and CitationDobson (2001).
11. Quoted in CitationChan & Ramkishan (2001).
12. Both REMU and ARIC can be found at http://aric.adb.org.
13. The ASEAN Secretariat has also proposed a regional financing arrangement whereby each member central bank sets aside some of its reserves, say 5 percent, to be placed with the other central banks on a pro rata basis, in order to increase the role of local currencies within the region and decrease dependence on outside currencies. Members would then be permitted to borrow multiples of the placement amount (CitationRana, 2002).
14. For further details on the Kobe Research Project, try www.rieb.kobe-u.ac.jp or www.worldbank.org.
15. The literature on the choice of an exchange rate regime is voluminous. In the Asian context, see the readings in CitationCollignon et al. (1998), and more recently, CitationRajan (2002).
16. For an in-depth discussion of the suitability of EA for closer monetary integration, see CitationWilson (2004).
17. If increasing trade between potential OCA countries increases specialization it is not clear that this should also lead to closer business cycle synchronization, but it is much more likely if, as in the European case, trade integration takes the form of increasing intra-bloc intra-industry trade. See CitationKrugman (1993).
18. If the Maastricht convergence criteria were strictly applied in 1996 (CitationWilson, 1998), Portugal, Spain and Italy failed on price stability, and only Finland, the Netherlands, Luxembourg and Ireland passed on budget deficits. One year later, all 11 future members passed on interest rates, price stability and budget deficits and were within the widened band of the ERM. Interestingly, Argentina, which was in deep economic crisis in 2002, also passes these tests in 1997 (Dagens Industria, Monday 14 January 2002, Finaus, p. 22, from www.di.sc).
19. Using an OCA index they found that some pairs of countries did as well as those in Europe: Singapore paired with Malaysia, Thailand, Hong Kong, Taiwan; and Hong Kong paired with Taiwan. Other groupings were less plausible.
20. Singapore is, in reality, now a fully-developed country. In 1995 The OECD decided to stop classifying Singapore as a developing country and re-classified her from a newly-industrializing country to ‘a more advanced developing country’. Korea, on the other hand, was elevated to full OECD membership in October 1997, which automatically brings with it developed country status. Singapore's status here looks decidedly odd, but the authorities in Singapore remain adamant that she is not yet a developed country. For a discussion of this anomaly, see CitationWilson (2000).
21. Country-specific shocks might include changes in monetary or fiscal policy, in productivity, or in the terms of trade, while regional shocks from the EA point of view could arise from changes in the yen–dollar rate or China's accession to the World Trade Organization. Good examples of global shocks would be an oil price hike or the terrorist attacks in the USA in September 2001.
22. For further details on changes in Singapore's global perspectives, see CitationPeebles & Wilson (2002).
23. ‘institutionalized’ at the Seventh ASEAN Summit in 2001, there is some rivalry about where it should be located, with Malaysia making a strong bid to host it in Kuala Lumpur, and some concern about the lines of demarcation between the new organization and the existing ASEAN secretariat based in Jakarta, and the APEC secretariat in Singapore.
24. This contrast between the European ‘happy family’ model of integration and the ‘good neighbours’ model, was recently expressed by Pascal Lamy, the EU Trade Representative, and is reported in the Singapore Business Times of 18 February 2002.
25. When the yen appreciates against the dollar, such as between 1991 and 1995, EA excluding Japan grows faster and attracts more foreign capital. When the yen depreciates, as between 1996 and 1998, the cycle is reversed.
26. The change in Korea's exchange rate regime to incorporate more flexibility combined with capital account liberalization may have increased the co-movement between the won and the yen (CitationKang et al. 2003).
27. Robert Mundell, at an ADB Lecture in 2001, also proposed that Hong Kong fully dollarize in order to speed up monetary convergence in EA. Since China is already effectively pegged to the dollar, an explicit ASEAN+3 peg to the dollar would encourage convergence to an Asian dollar area as an interim step towards a common currency.
28. The dollar pegging coefficients are obtained from the following regression based on CitationMcKinnon (2000), where SWF is the Swiss franc (used as the numeraire), USD is the US dollar, JPY is the yen, DEM is the German mark or euro after 1 January 1999: %Δ (Local Currency/SWF) = β 1+ β 2 %Δ (USD/SWF) + β 3 %Δ (JPY/SWF) + β4 %Δ (DEM/SWF) + ϵ.
29. Earlier evidence in favour of dollar pegging is summarized in CitationNicolas (1999).
30. This is complicated insofar as the classification of exchange rate regimes de facto in terms of the propensity of the monetary authorities to intervene in the face of market pressure is clearly defined only in the case of intervention that ‘leans against the wind’ (CitationNitithanprapas & Willett, 2002).
31. There is, however, no evidence of a significant yen bloc.
32. Other non-Asian examples include Brazil (1999), Mexico (1999), the Czech Republic (1998) and Poland. (1998). Earlier converts include the advanced industrial economies of Australia (1994), Canada (1991), New Zealand (1990), Sweden (1993), Switzerland (2000), United Kingdom (1992), and non-Asian emerging economies such as Chile (1991) and Israel (1992). See CitationHo & McCauley (2003) for full details.
33. As CitationHo & McCauley (2003) point out, Singapore can be interpreted as a rather unusual case of inflation targeting where managing the exchange rate is the means to managing inflation. This is possible because the economy is so open and the pass-through so high that to stabilize inflation requires management of the NEER around a rate that varies according to the gap between global and desired inflation.
34. See CitationBird & Rajan (2002).
35. This would not rule out some joint stabilization at a later date against outside currencies such as the dollar or euro as an implicit CBP.
36. Concern about the net social costs of greater exchange rate flexibility since the breakdown of the Bretton-Woods system and the desire to coordinate macroeconomic policy was mirrored in initiatives undertaken by the Group of 5 and Group of 7 countries through the Plaza Agreement in 1985 and Louvre Accord in 1987, but progress was de-railed by the stock market crash of October 1987 and little progress has been made since to go beyond rudimentary forms of policy cooperation. This makes regional initiatives more attractive.
37. There appears now to be a greater willingness to use controls to deter speculative inflows. In October 2003, the Bank of Thailand acted to limit foreign holdings of baht accounts and the Korean central bank announced that it was ready to act to stabilize currency markets if necessary.
38. This trade-off between flexibility and credibility and the need for a more rules-based approach were suggested by an anonymous referee.
39. As CitationWyplosz (2002) points out, although Germany subsequently played an important role as a hegemon in European monetary integration, it was reluctant to do so, it was not a planned outcome and it would have been fiercely resisted ex ante by other European countries. Similarly, despite the fact that France and Germany have dominated the European movement, this has not been to the exclusion of other countries.
40. The case for a European type of collective exchange rate arrangement in EA is made in CitationWyplosz (2002).