Proposed Strategy for a Regional Exchange Rate Arrangement in Post-Crisis East Asia

Abstract

After disc USSillg major conceptual and empirical issues exchange rate stability is suboptimal. A pragmatic policy relevant to the exchange rate policies of East Asian option-conducive to a more robust framework for counLtries, Kawai and Takagi propose a regional cooperation in monetary and exchange rate policyexchange rate arrangement designed to promote would be a coordinated action to shift the target of intraregionial exchange rate stability and regional nominal exchange rate stability to a basket of tripolar economic growth. They argue that: currencies (the U.S. dollar, the Japanese yen, and the * For developing countries, exchange rate volatility euro). This alternative would better reflect the region's tends to significantly hurt trade and investment, making diverse structure of trade and foreign direct investment. it inadvisable to adopt a system of freely floatingThe authors envision no rigid peg. Instead, at least exchange rates.initially, each country could choose its own formal * Given the high share of intraregional trade and the exchange rate arrangement-be it a currency board, a similarity of trade composition in East Asia, exchange crawling peg, or a basket peg with wide margins. At rate policy should be directed toward maintaining times of crisis, the peg might be temporarily suspended, intraregional exchange rate stability, to promote trade, subject to the rule that the exchange rate would be investmerit, and economic growth.restored to the original level as soon as practical. Only in * The current policy of maintaining exchange rate extreme circumstances would the level be adjusted to stability against the U.S. dollar as an informal, reflect new equilibrium conditions. ntcoordiniated mechanism for ensuring intraregional 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. Copies of the paper are available free from the World Bank,

A De Facto Asian-Currency Unit Bloc in East Asia: It has Been There but We did not Look for It

“…To the extent that RMU targeting is present, a regional financial institution would benefit from "officially" declaring some weights as a basis for better coordination of countries on the basket that they target, and for issuance of bonds denominated in such a unit. Further, greater reserve pooling within the Multilateralized Chiang Mai Initiative (CMIM), and strengthened regional economic surveillance within the Economic Review and Policy Dialogue (Kawai and Takagi 2009), may contribute to reaching exchange rate targets de facto adopted by many countries in the region.…”

“…Given the rapid rise of intraregional trade integration among these economies, and on the basis of models of optimal basket pegs (Benassy-Quéré 1999), many observers favor east-Asian countries pegging their currencies to a basket where regional currencies are included (Kawai and Takagi 2000;Kawai 2007;Ogawa and Shimizu 2005;Williamson 2005). However, it may not be optimal to include only one regional currency in the basket (i.e., the Japanese yen) on top of the dollar and the European Union euro, thus making it a basket of G3 currencies (Mundell 2003), particularly in view of the growing role of the PRC as a hub of regional trade.…”

“…Indeed, ongoing debate has those who champion basing weights for a regional currency unit on nominal gross domestic product (GDP) (Kawai and Takagi 2009;Girardin and Steinherr 2008) opposite those who would base such weights on GDP adjusted by purchasing power parity (PPP) (Ogawa and Shimizu 2005)-on top of trade and financial weights which are less controversial. While PPP-adjusted GDP weights have a forwardlooking nature, they are rather arbitrary.…”

Macroeconomic Determinants of Corporate Failures in Malaysia

“…However, according to a study on exchange rate volatility by Kawai and Shinji (2001), the values of East Asian currencies began to show relative stability from November 1998, which indicates the end of the East Asian turmoil. The parameter of 0 α is the intercept and …”

How Useful Is an Asian Currency Unit (ACU) Index for Surveillance in East Asia?

“…The implication of this so-called coordination failure is that a unilateral decision by one country to achieve stability vis-à-vis another currency may not be the optimal option for all countries in the region. Interestingly, many studies have called for pegging East Asian currencies either to a basket comprised of the Group of Three (G-3) currencies (US dollar, Japanese yen, and euro) (Mundell 2003) or to a basket composed of regional currencies (Kawai and Takagi 2000;Kawai 2008;Kawai 2009;Kawai and Takagi 2012;Ogawa and Shimizu 2005), and there have even been calls for the harmonization of inflation targets in the region (Genberg 2006;Gudmundsson 2008). …”