Monetary Cooperation Research Articles

The Euro Crisis. What Went Wrong with the Single European Currency?

This article delivers a brief contribution to the debate about the Euro crisis. With that purpose it lists the objectives, interests and power relations underlined by the main political actors by the time of the introduction of monetary cooperation within the field of European construction. It begins with a reference to the first experiments of monetary cooperation between European countries—with the so-called European Snake, and later the European Monetary System—which were intended to protect the common market from the turmoil caused by the collapse of the international monetary system. It also addresses the adoption of the economic and monetary union by the Treaty of Maastricht, the creation of the single currency and the first attempt to control fiscal policy with the Stability and Growth Pact. Then it concentrates on the crisis affecting the Eurozone, initiated with the Greek sovereign debt crisis. It starts with a reference to core Euro countries early reaction to the crisis, to continue with the measures adopted to support the Euro system, before discussing what would be the much needed firewalls that could deter financial attacks. The final sections are devoted to the Fiscal Treaty, and to the impact of crisis management on the European Union balance of powers.

The dampening effect of bank foreign liabilities on monetary policy: Revisiting monetary cooperation in East Asia

This paper addresses the cost of formal monetary cooperation from the perspective of monetary policy effectiveness. As banks tend to borrow from abroad in foreign currencies to fund domestic lending, monetary policy may have a reduced effect on the credit market and the economy. Results derived from bank level data in East Asia indicate that bank foreign liabilities significantly reduce the effectiveness of the credit channel of monetary policy, implying a relatively low cost of giving up monetary autonomy.

Who Invokes the Escape Clause: The Political Determinants of the European Monetary System Realignments

The European Monetary System (EMS) was set up in 1979 as a step in the monetary integration of the European Community. At its core, the EMS worked as fixed but adjustable exchange rates and, despite its success in retaining country membership, it experienced a series of currency realignments against the German currency. This paper links the use of realignments to escape clauses in a monetary cooperation agreement and derives hypotheses about who and when is more likely to invoke such clauses. I argue that realignment behaviour is driven by credibility considerations for domestic monetary policy; implications for European trade; the institutional structure of the EMS and its centrality to the larger process of European integration; as well as the behaviors of the core nations – Germany and France. Using monthly data on exchange rate realignments for all EMS members from 1979 to 1993, I find strong support for the hypotheses.

Financial and Monetary Cooperation in Asia: Challenges after the Global Financial Crisis

This paper reviews recent developments in regional financial and monetary cooperation in East Asia, and suggests some issues that could contribute to more constructive development in the future. The regional monetary and financial cooperation was originally motivated by the Asian financial crisis, but it has faced new challenges due to some recent events, such as the global financial crisis and global imbalances. We review recent developments of regional financial and monetary cooperation in East Asia, such as CMIM, ABMI and ABF, and regional surveillance mechanisms. We argue that there are several issues to be discussed in developing more effective regional financial and monetary cooperation: including developing CMIM to be effective in preventing future crisis, linking regional cooperation with global financial architecture properly, constructing effective surveillance mechanism, and strengthening regional policy dialogue.

Comments on ‘Financial and Monetary Cooperation in Asia: Challenges after the Global Financial Crisis’ by Soyoung Kim and Doo Yong Yang

I would like to congratulate the authors for writing a timely and engaging summary of the changes that have occurred in the regional financial architecture in East Asia. East Asia has made substant...

Comment on “Financial Integration in Emerging Asia: Challenges and Prospects”

Park and Lee (2011) examine the degree and nature of financial integration in emerging Asia. These issues are of importance because financial integration offers many benefits including better consumption smoothing through international risk sharing, more efficient allocation of capital for investment, and enhanced macroeconomic and financial discipline. Despite these beneficial impacts, deeper financial integration generates a higher risk of cross-border financial contagion. The existence of a trade-off relationship between the benefits and the costs of deeper financial integration makes it difficult for policymakers to formulate appropriate policies regarding financial integration. Park and Lee’s findings suggest that emerging Asian equity markets are increasingly integrated both regionally and globally, while its local currency bond markets remain generally segmented from the overseas markets. Despite the progress of regional integration in emerging Asia, the region’s equity markets remain integrated more globally than regionally. Park and Lee identify some hurdles to financial integration in emerging Asia, which include the absence of an anchor country or financial centers in the region, a low level of capital market liberalization, and limited financial and monetary cooperation for exchange rate stabilization. To overcome these hurdles, they argue that emerging Asia needs to further liberalize its capital markets and promote financial/monetary cooperation to deepen financial integration. In order to reduce the risk of cross-border financial contagion, Park and Lee advocate active steps to foster deeper and more liquid domestic capital markets, and effective financial supervision. The development of vibrant local currency bond markets is essential to more efficiently channel the region’s abundant resources. I would like to take up three issues. One issue has to do with the benefits and the risks involving global financial integration on the one hand, and regional financial integration on the other. Park and Lee seem to give an impression that for the East Asian emerging economies, regional financial integration is more desirable than global financial integration. I wonder if this view can be vindicated. In terms of the benefits in the form of the depth of the market or the availability of financial resources and their efficient use, global financial integration may surpass regional financial integration because of the latter’s limited coverage. In terms of avoiding risks, regional financial integration may be more favorable. However, this observation may be correct if the probability of the emergence of

A Simulation Study of an ASEAN Monetary Union

This paper studies the pros and cons of a monetary union for the ASEAN1 countries, excluding Myanmar. We estimate a stylized open-economy dynamic general equilibrium model for the ASEAN countries. Using the framework of linear quadratic differential games, we contrast the potential gains or losses for these countries due to economic shocks, in case they maintain their status-quo, they coordinate their monetary and/or fiscal policies, or form a monetary union. Assuming for all players open-loop information, we conclude that there are substantial gains from cooperation of monetary authorities. We also find that whether a monetary union improves upon monetary cooperation depends on the type of shocks and the extent of fiscal policy cooperation. Results are based both on a theoretical study of the structure of the estimated model and a simulation study.

The Political Economy of Reducing the United States Dollar’s Role as a Global Reserve Currency

Many have argued that the major source of the existing global macroeconomic imbalances are the twin deficits of the United States (US). However, there is still a debate about whether the global imbalances indeed pose a significant threat to the world economy. This paper analyzes whether current efforts in East Asia in terms of financial and monetary cooperation and rebalancing of economic growth could significantly mitigate the adverse impacts of a global system that will still be dominated by the US dollar in the foreseeable future. It also explains why the People’s Republic of China is unlikely to make significant unilateral adjustments to reduce global macroeconomic imbalances.

ASIAN MONETARY UNIT (AMU) AS A SURVEILLANCE INDICATORS FOR REGIONAL MONETARY COOPERATION

Ogawa and Shimizu (2005) proposed an Asian Monetary Unit (AMU), which is a common currency basket composed of ASEAN plus three Asian currencies, and AMU Deviation Indicators (AMU DIs), which indicates deviations of each Asian currency in terms of the AMU compared to the benchmark rate. In this paper, we use daily and monthly data of AMU and AMU DIs to examine their usefulness as a surveillance indicator for monetary cooperation in Asia. We find that an AMU peg system stabilizes the trade-weighted exchange rates within Asia and that AMU DIs warn of misalignments of and between Asia currencies.

Cooperação monetária e financeira: o que é bom para a Ásia também é para a América Latina?

Monetary and financial cooperation: what is good to Asian is also good to Latin America?. This article compares the Asian and Latin American experiences with monetary cooperation. It is argued that in the latter such cooperation has hardly progressed, due to low degree of regional integration, the recurrent use of multilateral institutional resources to deal with external shocks and the lack of clear objectives: monetary cooperation is some times seen as a means to foster integration, but also as a means to provide long term funds and as a source of liquidity in foreign currencies. In Asia, differently, cooperation has apparently not been so instrumental to regional integration, but has proven to be quite important as a means to build a regional capital market as well as a mechanism to deal with external shocks.

Economic thought at the European Commission and the creation of EMU (1957-1991)

To understand macroeconomic and monetary thought at the European Commission, two elements are crucial: firstly, the Rome Treaty, as it determined the mandate of the Commission and, secondly, the economic ideas in the different countries of the European Community, as economic thought at the Commission was to a large extent a synthesis and compromise of the main schools of thought in the Community. Initially, economic thought at the Commission was mainly a fusion of French and German ideas, with a certain predominance of French ideas. Later, Anglo-Saxon ideas would gain ground. At the beginning of the 1980s, the Commission's analytical framework became basically medium-term oriented, with an important role for supply-side and structural elements and a more cautious approach towards discretionary stabilisation policies. This facilitated the process of European integration, in the monetary area too, as consensus on stabilityoriented policies was a crucial condition for EMU. Over the years, the Commission has taken its role as guardian of the Treaties and initiator of Community policies very seriously, not least in the monetary area. It has always advocated a strengthening of economic policy coordination and monetary cooperation. In this paper, we first focus on the different schools which have been shaping economic thought at the Commission. This is followed by an analysis of the Rome Treaty, especially the monetary dimension. Thereafter, we go into the EMU process and the initiatives of the Commission to further European monetary integration. We will consider three broad periods: the early decades, the 1970s, and the Maastricht process.

The Role Of Euros In Eurozone Regionalism And World Globalization

The success of Eurozone regionalism is primarily based on the establishment of regional monetary cooperation that resulted in creation of the Euro. In addition, the development of regional strategies for increasing competitiveness of the region and the establishment of structural funds for assisting economic restructuring, solving the social problems, and reducing the differences in the social economic structure of the member countries helped Eurozone integrates fully with the global economy. Just as the Euro has successfully helped the processes of regionalism (globalization on a smaller scale) in Eurozone, a global currency would be necessary counterpart to the further globalization of world economies. As regional monetary cooperation was required in Eurozone for success of the Euro, a global monetary cooperation is needed for creation and success of a global currency. This paper explores the success of the Euro in Eurozone regionalism, the formation of a global monetary cooperation, development of a framework for currency fluctuations among main currencies (dollar, euro, and yen), and ultimately creation of global currency.

Distribution, Domestic Politics and Monetary Cooperation in East Asia

Since the financial crises of 1997, East Asia has made modest but nonetheless significant steps towards greater regional integration and cooperation in the areas of finance and trade, accompanied by progress on institution-building at the regional level. Monetary cooperation, however, has not proceeded to anything like even the modest levels registered for other functional areas of cooperation. This paper investigates this discrepancy. It asks whether monetary cooperation is simply an unattractive proposition because it promises fewer net gains than cooperation on other issues, or whether there are other explanations for the absence of monetary cooperation in the region.

Exchange Rates‚ Currency Crisis and Monetary Cooperation in Asia

Exchange Rates‚ Currency Crisis and Monetary Cooperation in Asia

Asian Monetary Unit and Monetary Cooperation in Asia

Regional monetary and financial cooperation in Asia has been discussed for years. To move towards a coordinated exchange rate policy, Ogawa and Shimizu (2005) proposed both an Asian Monetary Unit (AMU), which is a common currency basket computed as a weighted average of the thirteen ASEAN 3 currencies, and AMU Deviation Indicators (AMU DIs), which indicates the deviation of each Asian currency in terms of the AMU compared with the benchmark rate. The AMU and the AMU DIs are considered both as surveillance measures under the Chiang Mai Initiative and as benchmarks for coordinated exchange rate policies among Asian countries. In this paper, the authors show that monitoring the AMU and the AMU DIs plays an important role in the regional surveillance process under the Chiang Mai Initiative. By using daily and monthly data of AMU and AMU DIs for the period from January 2000 to June 2010 which are available from the website of the Research Institute of Economy, Trade, and Industry (RIETI), they examine their usefulness as a surveillance indicator. Our studies of AMU and AMU DIs confirm the following: first, an AMU peg system stabilizes the nominal effective exchange rate (NEER) of each Asian country. Second, the AMU and the AMU DIs could signal overvaluation or undervaluation for each of the Asian currencies. Third, trade imbalances within the region have been growing as the AMU DIs have been widening. Fourth, the AMU DIs could predict huge capital inflows and outflows for each Asian country. The above findings support the usefulness of using the AMU and the AMU DIs as surveillance indicators for monetary cooperation in Asia.

Norman's Lament: The Greek and Euro Area Crisis in Historical Perspective

This article uses original and secondary archival sources to examine the value of the distinction between creditor and debtor states in explaining the behaviour of domestic elites in international and European macroeconomic and monetary cooperation, compared to variables like size and trade. It highlights the paradox and tension between changes in institutional forms and stronger incentives to cooperate (Montagu Norman's ‘new Europe’) and persisting patterns in strategic behaviour across space and over time. Central to this continuity is a fundamental asymmetry of power between creditor and debtor states. The imbalances that underpin creditor–debtor state relations also reveal the structural underpinnings of arguments from economic principle, ‘who argues what’ and receptiveness to economic ideas and thinkers. Not least, the case studies and arguments in the article offer fresh and different insights into British and French attitudes to European coordination.

The Evolving Renminbi Regime and Implications for Asian Currency Stability

The Chinese authorities described the management of the renminbi after its 2005 unpegging from the US dollar as involving a basket of trading partner currencies. Outside analysts have detected few signs of such management. We find that, in the two years from mid-2006 to mid-2008, the renminbi strengthened gradually against trading partners' currencies within a narrow band. In mid-2008, the financial crisis interrupted this experiment and the bilateral renminbi/dollar exchange rate stabilised at 6.8. The 2006-08 experience suggests that a shared policy of gradual nominal effective appreciation renders East Asian currencies quite stable against one another. Such a shared policy would create favourable conditions for regional monetary cooperation.

The evolving renminbi regime and implications for Asian currency stability

The Chinese authorities described the management of the renminbi after its 2005 unpegging from the US dollar as involving a basket of trading partner currencies. Outside analysts have detected few signs of such management. We find that, in the 2 years from mid-2006 to mid-2008, the renminbi strengthened gradually against trading partners’ currencies within a narrow band. In mid-2008, the financial crisis interrupted this experiment and the bilateral renminbi/dollar exchange rate stabilised at 6.8. The 2006–2008 experience suggests that a shared policy of gradual nominal effective appreciation renders East Asian currencies quite stable against one another. Such a shared policy would create favourable conditions for regional monetary cooperation.

The Role of International Law in Monetary Affairs

Monetary affairs have been a stronghold of national sovereignty, and international law is poorly developed in this field, which has been characterized by informal coordination. This article explores the theoretical underpinnings of monetary competition and the potential role of international law in framing such competition beyond institutional arrangements. We argue that, so far, the most important contribution of international law to financial stability has been made by an open and rule-based trading system of the World Trade Organization and the legal protection of investment. As to monetary cooperation, different models are discussed, ranging from harmonization and formal cooperation to predominantly informal, asymmetrical arrangements. While affirming the need for monopoly powers in the field, we argue that international monetary competition is the main tool in preventing and remedying the risks of abuse of monopoly powers inherent to national currencies. It should be framed accordingly within a system of multilayered governance. The article asks what can be learned from principles of competition and trade policies. It argues that principles of non-discrimination, in particular, national treatment and conditional most-favored nation, offer an important starting point in achieving a rule-based regulatory framework for stable monetary competition. Oxford University Press 2010, all rights reserved, Oxford University Press.

MONETARY AND FISCAL POLICY EFFICIENCY AND COORDINATION IN A MULTI-SECTOR OPEN-ECONOMY GENERAL EQUILIBRIUM MODEL

The paper analyzes monetary and fiscal stabilization and coordination in a multi-sector stochastic new open economy macroeconomics (NOEM) model. It first aims to assess the capacity of fiscal and monetary policy to reduce or eliminate the negative welfare effects of an unanticipated productivity shock affecting some or all of the sectors in each country. Second, it evaluates the possible gains from international monetary cooperation as well as the impact of active fiscal policy on the welfare performance of monetary policy. The setup also allows for international asymmetry concerning the uncertainty over the shocks. The results show that monetary and fiscal policies are efficient tools of stabilization and under several conditions they can replicate the flexible-price equilibrium. However, their welfare performance is not necessarily increased when both monetary and fiscal policies react to shocks at the national level. The existence of bilateral gains from monetary cooperation depends on the degree of asymmetry concerning the uncertainty over the shocks.