Regional Currency Research Articles

The endogeneity of the Optimum Currency Area criteria in East Asia

The Asian financial crisis in mid-1997 has increased interest in policies to achieve greater regional exchange rate stability in East Asia. It has renewed calls for greater monetary and exchange rate cooperation. A country's suitability to join a monetary union depends, inter alia, on the trade intensity and the business cycle synchronization with other potential members of the monetary union. However, these two Optimum Currency Area criteria are endogenous. Theoretically, the effect of increased trade integration (after the elimination of exchange fluctuations among the countries in the region) on the business cycle synchronization is ambiguous. Reduction in trade barriers can potentially increase industrial specialization by country and therefore resulting in more asymmetry business cycles from industry-specific shocks. On the other hand, increased trade integration may result in more highly correlated business cycles due to common demand shocks or intra-industry trade. If the second hypothesis is empirically verified, policy makers have little to worry about the region being unsynchronized in their business cycles as the business cycles will become more synchronized after the monetary union is formed. This paper assesses the dynamic relationships between trade, finance, specialization and business cycle synchronization for East Asian economies using a Generalized Method of Moments (GMM) approach. The dynamic panel approach improves on previous efforts to examine the business cycle correlations — trade link using panel procedures, which control for the potential endogeneity of all explanatory variables. Based on the findings on how trade, finance and sectoral specialization have effects on the size of common shocks among countries, potential policies that can help East Asian countries move closer toward a regional currency arrangement can be suggested. The empirical results of this study suggest that there exists scope for East Asia to form a monetary union.

A tale of Asian exchange rate management: Romance of the three currencies

Asian currencies lack regional policy coordination and are therefore subject to volatilities such as the Asian currency crisis of 1997/99. As the Asian currencies have already been observed to be ‘flying-in-unison’, a stable exchange rate arrangement can be helpful as the next step of evolution for regional financial stability. We consider that creating a cluster effect from coordinated efforts/policies of policy-makers can lead to regional exchange rate stability. To demonstrate this cluster effect, a three-party-game is computed for an Asian bloc, viz-á-viz US dollar and the Euro, based on a Nash and a cooperative equilibrium. The cluster effect would generate external and internal pressures that work towards the formation of a regional currency, although the exact form of exchange rate regime would have to await political consensus. There are substantial welfare gains within Asia network economy through currency cooperation. The formation of an Asian currency bloc would also create counter-balance to the current dominance of the US dollar and the Euro. Like the epic story of Three Kingdoms who sought hegemony in Chinese history, the Asian currency bloc will contend with many possible outcomes of competition as well as cooperation.

The Impact of Real Exchange Rate Flexibility on East Asian Exports

ABSTRACTThis paper estimates the impact of intra‐regional real exchange rate flexibility on East Asian exports. The hypothesis is that the impact would be negative for East Asian countries regardless of their exchange rate regimes. The results validate the hypothesis. The findings show that for Chinese exports the long‐run effect is as much as that of a real appreciation of renminbi. By contrast, for Japanese exports the effect is three times larger than that of a real appreciation of the yen. The findings imply that a regional currency basket mechanism would lessen the adverse effect of exchange rate flexibility and engineer a collective exchange rate adjustment for resolving the global payment imbalance against East Asia.

Macroeconomic Synchronization and Foreign Direct Investment Inflow into ASEAN: Evidence from Malaysia’s Experiences

ASEAN has experienced remarkable growth performance in the last decade, in particular the period before the 1997 economic crisis. This great achievement is partly attributed to the inflow of foreign direct investments (FDI) into the region. Today, ASEAN is facing stiff competition to attract FDI inflow with the emergence of China and India as new competitors or locations for (FDI). Meanwhile, the 1997 economic crisis has also resulted in large volatility especially exchange rate volatility. As part of the efforts to stabilize the region, there is a suggestion that ASEAN has to pursue regional currency. Regional currency, in turn, requires ASEAN macroeconomic to converge or synchronize to enable all members will be benefited from the formation. In the nutshell, it is the importance of this convergence that propels this study to undertake an investigation into the impact of several macroeconomic convergences on the FDI flow into ASEAN. As expected, this study found that macroeconomic synchronization, which is believed as able to strengthening the formation of ASEAN Free Trade Area (AFTA) if successfully coordinated, has a significant impact on the inflow of FDI into the region.

The Impact of a Common Currency on East Asian Production Networks and China's Exports Behavior

Vertical fragmentation of product value chain across borders is the driving force of growing economic interdependency in East Asia. A common currency, not flexible exchange rates between national currencies, would reduce flexibility in relative prices within East Asia. Its impact would be far greater for exports that have stronger production network linkage. In order to test the hypothesis, the paper estimates the effect of a common currency on China's processing and ordinary exports separately. The distinction is necessary because the processing exports, unlike the ordinary exports, are produced along the regional production networks, with final stages of assembly and exporting being increasingly concentrated in China. The short-run dynamics indicate that the effect on China's processing exports is more than double the corresponding effect on China's ordinary exports. The long-run effect on the processing exports of intra-regional RER flexibility, which is otherwise the lack of a regional currency, is almost nine times as large as the long-run effect of a unilateral RMB appreciation. By contrast, the corresponding long-run effect is statistically insignificant for the case of ordinary exports that are produced primarily by using local inputs. The long-run coefficient of this intra-regional RER flexibility implies that the actual volume of processing exports is 20 percent below the potential. The magnitudes of these effects are consistent with the hypothesis that a common currency would further integrate East Asian production networks and promote regional economic integration.

The Triffin Dilemma Again

Tiny changes in the American monetary policy can have dramatic effects on the rest of the world because of dollar's double role of national and international currency. This is the Triffin dilemma. The paper shows how it works through three examples: price of commodities, dollarization, and the international financial position of the US. And it makes a proposal to solve these issues, creating a more stable monetary system. In particular, it suggests the creation of an international monetary system of block regional currencies. Globalization and regionalization should be the two forces leading towards the new monetary system. The US and Europe should consider to adopt the same currency through a system of fixed exchange rates (global currency). This currency should perform its duty of anchor of the system, reducing global imbalances and gyrations in price of commodities. Developing countries, by contrast, should create regional monetary unions (regional currencies), preserving the real exchange rate as shock absorber, but gaining in terms of time consistency and credibility.

A Currency Union or an Exchange Rate Union: Evidence from Northeast Asia

This paper examines whether or not Northeast Asia economies, namely, China, Japan, Korea, and Taiwan, can form a currency union, where a single currency and a uniform monetary policy are adopted, or an exchange rate union where all the currencies are pegged to an internal or external currency or an optimum currency basket. The analysis of correlations of supply shocks, exchange rate shocks, monetary shocks, and demand shocks, which are estimated applying the structural VAR model with identification restrictions imposed, to the data for the period from 1970 through 2004, shows that shocks of these economies are not symmetric, in general, implying that the Northeast Asian economies are not ready yet to form a common currency union. However, it is found that the Northeast Asian countries can form an exchange rate union with a major currency basket, which consists of the U.S. dollar, the euro and the Japanese yen, as an anchor currency. The paper also examines the option of pegging to a basket of regional currencies, similar to the Asian Currency Unit (ACU), and discusses policy implications.

Global Financial Crisis & Implications to Thailand: An Ex-Banker's View

The current global financial crisis is not a typical crisis with simple economic contraction. The crisis is caused by the endogenous risk generating and amplified within the banking system and credit market. In the past boom and bust cycle caused by excessive speculation is localized and caused by exogenous risk. This may be easily contained. In the past, another strong balance sheet financial institutions, rich nation, IMF or World Banks that have separated financial system may rush into rescue. But nowadays securitization process has spread out the risks to every part of the world. In the deregulated global finance, all banks' balance sheets are interlocked and cascaded by common factors like the fear of inability to price and to sell ABS CDO and CDS. As every financial institution reacts to the high uncertainty, banks stop lending to each other. Credit freeze and liquidity crunch. De-leveraging process (D-process) become self-perpetuating process as all institutions are forced to run down investment and risk participation (e.g. equity, lower grade debt, real estate..) most dependence on credit and liquidity and from long term credit vehicles (e.g. bonds, CDO..). Quantitative monetary easing, coordinated rate cut around the world and liquidity injection from the government may stem the panic and only stabilize the financial market, not a quick end to the worldwide recession. Liquidity problems among the financial institutions may be eased off, but the real economy is frozen. During de-leveraging process (D-process), monetary policy by central bank may not be effective to revive the economy though it may ease off pressure in banking and capital market. A well judge fiscal spending for pro-productivity growth policy beyond central bank's mandate is strongly encouraged; the fiscal stimulus for consumption is strongly discourage. Neither a new administration nor another fiscal package may provide a clear resolution to the crisis unless global banking and international capital market begin to function again. Global financial crisis is transforming to global economic crisis that need a global solution or at least a regional one. Blanket deposit insurance, Basel II compliance and IAS 39 amendment are among the topics of discussion in this paper in Thailand's context. A new way of coordinate public coordination policy (e.g. BoT's middle ground regulation relaxation, SME loan guarantee, etc.) should be thought out systemically as many lessons should be learned from the 1997 crisis episode. Internationally, the crisis time requires unorthodox measures. Fed and IMF have revealed their resilience and creativity to resolve the global financial crisis. Nevertheless this may not be enough because the global problem requires global solution with regional support. A new partnership among Asean with China, Japan and S. Korea should be pursued immediately to establish ABC Bank, the newly created mega development bank as the Asian version of combined World Bank and IMF roles. ACU, Asian Currency Unit with Asian regional currency backed up is presented for a new currency stock for a new era for more equitable Asian role in the financial world. The experiment with this idea is fine, but one should not lose sight of openness and market friendly policy as the core value.

Alternatives to Expedite Macroeconomic Convergence of the SADC Countries

Countries comprising of the Southern African Development Community (SADC) region show satisfactory progress with the achievement of the region’s macroeconomic convergence goals. Five countries achieved all four goals set for 2008 already in 2006; five achieved three of the goals and the other four achieved two goals. In addition, countries in the SADC region have achieved their target for the establishment of a free trade area. The achievement of these goals supports SADC’s ultimate objective of establishing a regional central bank with a single regional currency by 2016. Since 1857, European experiences with monetary unions have shown that unification can at best be regarded as a challenging prospect for any region. Judged in terms of the European experience, SADC does not face insurmountable challenges in its quest for monetary unification and a single central bank. However, governments of countries in the SADC region should consider whether a regional central bank should follow discretionary monetary policy catering for particular economic shocks, or monetary policy based on rules using a monetary policy anchor. Neither approach leaves easy choices, as governments of SADC countries would have to establish a structure to consider and select a monetary policy framework. At a microeconomic level, the benefits of establishing a regional central bank and adopting a single regional currency are to free private enterprises, business firms and individuals from transaction costs in intraregional trade and travel. It will also increase price transparency and competition between countries and stabilize consumer prices in countries suffering prolonged inflation due to sustained exchange rate depreciation. Four initiatives can enhance SADC’s progress. First, the macroeconomic convergence criteria should be clarified and the timely publication of macroecoInt Adv Econ Res (2008) 14:479–480 DOI 10.1007/s11294-008-9183-6

The Asian Currency Unit (ACU): exploring alternative currency weights

While most observers concur that the time is not ripe for Asia to consider a common currency, there has been some discussion about the possible creation of an Asian Currency Unit (ACU). This paper examines the specific issue of the ACU which, in a general sense, is a weighted average of regional currencies á la the European Currency Unit (ECU) which was created in March 1979 under the European Monetary System (EMS). The paper critically examines the rationale for the ACU proposal and offers an initial attempt at computing optimal currency composition of the ACU. The optimal basket weights computed are aimed at ensuring a regional currency basket that has minimal variance. Hence it will deliver stability in intra-regional exchange rates for alternative configurations of currency baskets in the Asian and Pacific region.

Gulf Cooperation Council Oil Exporters and the Future of the Dollar

Since the mid-1970s, the value of the United States' dollar has been upheld by a number of domestic and international factors. An often underestimated factor is that oil is sold and traded in US do...

Real effects of common currencies in East Asia

Since the 1997 Asian currency crisis, new interest has emerged in the formation of a common currency area in East Asia. This paper provides estimates of trade and welfare effects of East Asian currency unions, using a micro-founded gravity model. Counter-factual experiments to assess the effects of various hypothetical currency arrangements for East Asia suggest that an East Asian currency union will double bilateral trade in the region, but the resulting welfare effects will be moderate. However, if Japan, a major trade partner for East Asia, is included in the union, welfare effects increase substantially. The evidence thus suggests that certain regional currency arrangements in East Asia will stimulate regional trade rigorously and can generate economically significant welfare gains.

Monetary Blocs on the Periphery: Small State Choice or Great Power Hegemony?

Over the past 40 years, enduring regional monetary institutions have been created in West and Central Africa, Southern Africa, the East Caribbean, and Western Europe. Short-lived or failed regional currencies can be found in East Africa, the post-Soviet successor states, Central America, and the Persian Gulf. Using the role of France in the franc zone as evidence, one common argument is that most regional efforts are merely by-products of hegemonic powers' ambitions and interests – imposed from above by great powers rather than chosen from below by newly independent states. By examining the overall pattern of regional currency institution-building during the Cold War and after, I show that the hegemonic argument is misleading. I also use archival evidence for an in-depth examination of Britain's influence on Southeast Asian cooperation during and after decolonisation. I find that extra-regional hegemons have played only a slight role outside the franc zone, and, even in the franc zone, French influence had its limits. Broadly comparing across all world regions – francophone Africa, anglophone Africa, Central America, the rouble zone, Southeast Asia, etc. – the common denominator is not hegemonic imposition, but small power choices.

A regional trend towards a basket peg system

Exchange rate volatility can be detrimental to growth and stability. For East Asian countries, a common basket system can be a way to reduce such volatility. By evaluating the weights of the dollar, the yen, and the euro in individual country's exchange rate, the paper shows that post-crisis fluctuations of regional currencies are no longer determined by the US dollar alone. Should the region decide to adopt a common basket, therefore, it is consistent with such a trend. The regional exchange rates also have not uniformly functioned as a stabiliser, suggesting there is a room for a basket peg system.

東アジアにおける地域通貨協力

This paper focuses on the regional monetary cooperation in East Asia for both management and prevention of currency crisis to investigate how the regional monetary cooperation has been developing since the Asian Currency Crisis in 1997 and what kind of problems are left for East Asian countries. It is pointed out that the Chiang Mai Initiative has not yet enough effective functions of the surveillance process for currency crisis prevention. Surveillance over exchange rates is necessary in order that the Chiang Mai Initiative should be more effective for currency crisis prevention. A regional currency unit is explained for the effective surveillance.

Asian Currency Baskets: An Answer in Search of a Question?

This paper considers whether an intra regional currency basket and the associated divergence indicators could play a useful role in official exchange rate surveillance. Recently, proponents of an Asian currency basket have referred to the role the European Currency Unit played in constructing exchange rate divergence indicators as evidence of the usefulness of intra regional currency baskets for exchange rate monitoring. The paper shows that such indicators have a number of features that can lead to them obscuring underlying changes in exchange rates and that the signals they emit will often be difficult to interpret. In addition, the use of regional currency baskets for surveillance can lead to potentially serious N − 1 problems in circumstances when there is not agreement about which regional currencies will be the anchor currencies.

Why doesn't regional monetary cooperation follow trade cooperation?

ABSTRACT Conventional theories in political economy argue that monetary cooperation is more likely in regions with trade interdependence. In practice, however, regional trade cooperation usually does not lead to monetary cooperation. I argue that this disparity results from different political economy logics in the two issue areas. In contrast to trade cooperation, the domestic actor that sacrifices the most in a regional monetary agreement is the government itself, which loses a significant tool for domestic economic adjustment as well as an important political symbol. Thus, monetary cooperation is only likely if there are direct benefits to the government to compensate for its lost monetary control. Benefits to the aggregate economy or to particular economic sectors are usually insufficient compensation. Experience with earlier monetary institutions, however, can in some cases reduce the costs to governments enough to make cooperation feasible. I explore these arguments with two sets of case studies: Central America and West Africa. Central America has had the highest level of trade cooperation in the developing world, but never successfully implemented monetary cooperation. West Africa, by contrast, developed a strong regional currency despite its very low intra-regional trade. West Africa did have, however, experience with prior regional monetary institutions that lowered the costs of new cooperation for newly independent African governments.

Can the Chinese Trade Surplus Be Reduced Through Exchange Rate Policy?

This paper shows empirically that China's trade balance is sensitive to fluctuations in the real effective exchange rate of the renminbi, although the size of the surplus is such that exchange rate policy alone will be unable to address the imbalance. One of the main reasons why the reduction in the trade surplus is limited is that Chinese imports are reduced with a real appreciation of the renminbi.By estimating bilateral import equations, we find that it is imports from other Southeast Asian countries which fall.This result reflects the vertical integration of Southeast Asia with China through the 'Asian production network'.We find, in turn, that imports from Germany - which serve China's domestic demand - behave as one would expect, ie they increase with renminbi real appreciation.All in all, our results raise concerns on the impact of renminbi appreciation on Southeast Asia even if regional currencies do not follow the renminbi's upward trajectory. Keywords: China, trade, exports, real exchange rate JEL classification: F1, F14

A Currency Union or an Exchange Rate Union: Evidence from Northeast Asia

This paper examines whether or not Northeast Asia economies, namely, China, Japan, Korea, and Taiwan, can form a currency union, where a single currency and a uniform monetary policy are adopted, or an exchange rate union where all the currencies are pegged to an internal or external currency or an optimum currency basket. The analysis of correlations of supply shocks, exchange rate shocks, monetary shocks, and demand shocks, which are estimated applying the structural VAR model with identification restrictions imposed, to the data for the period from 1970 through 2004, shows that shocks of these economies are not symmetric, in general, implying that the Northeast Asian economies are not ready yet to form a common currency union. However, it is found that the Northeast Asian countries can form an exchange rate union with a major currency basket, which consists of the U.S. dollar, the euro and the Japanese yen, as an anchor currency. The paper also examines the option of pegging to a basket of regional currencies, similar to the Asian Currency Unit (ACU), and discusses policy implications.

Regional Currency Unit and Exchange Rate Coordination in East Asia

Regional Currency Unit and Exchange Rate Coordination in East Asia