Search

This paper analyzes the optimal transition of the exchange rate regime in the People's Republic of China (PRC). How the PRC can successfully reach the desired regime - whether a basket peg or floating regime - from the current dollar-peg regime remains a major question. To answer it, we develop a dynamic small open-economy general equilibrium model. We construct four transition policies toward the basket-peg or floating regime and compare the welfare gains of these policies to those of maintaining the dollar-peg regime. Quantitative analysis using PRC data from Q1 1999 to Q4 2010 leads to two conclusions. First, a gradual adjustment toward a basket-peg regime seems the most appropriate option for the PRC, and would minimize the welfare losses associated with a shift in the exchange rate regime. Second, a sudden shift to a basket peg is the second-best solution. This is preferable to a sudden shift to a floating regime, since it would enable the authorities to implement optimal weights efficiently in order to achieve policy goals once a decision has been made to adopt a basket-peg regime.

An Asian Currency Unit (ACU) index is constructed using an alternative procedure which minimizes a basket or portfolio of assets expressed in terms of national currencies. Using this estimated ACU index and an ACU Deviation Indicator, the main finding of this study based on the current trajectory of East Asian currencies relative to this regional ACU average or benchmark is that there is a formation of two contrasting groups of countries in the region - one a group of strong currencies and the other a group of weak currencies. We emphasize that the implication of this contrasting trajectory in East Asian intra-regional exchange rates is to disturb the competitive trading relationships in the region which may result in wasteful beggar-thyneighbor policies in the region. As emphasized by other recent studies, e.g., Kawai and Takagi (2012), the region needs a kind of framework for exchange rate policy coordination that will promote intra-regional exchange rate stability. We suggest several ways in which the region can capitalize on using this ACU index in the immediate term for surveillance purposes, particularly, for purposes of assessing "over- and undervaluation" of the individual currencies from the regional ACU average and for flagging emerging vulnerabilities in individual economies in the region.

The purpose of this paper is to emphasize the importance of Europe's structural problems and governance as the cause of the current euro area crisis. The euro may have led to bubbles, but member economies were not free of trouble before the euro. Many members were losing competitiveness and in need of removing structural rigidities. If anything, the euro was expected to encourage structural reform, by taking away the easy choice of monetary and fiscal expansion. We first discuss the relationship between the single currency and economic stability in Europe. We confirm the asymmetries that remained after the introduction of the euro and then discuss the governance overhaul taking place in Europe today. This overhaul was something that should have been done before introducing the euro, and its advancement may be the silver lining of this crisis. Finally, we touch upon the implications for Asia and Japan, from the point of view of the choice of exchange rate regime as a method to advance necessary reforms.

This paper evaluates the extent of exchange rate coordination among Asian economies using a hypothetical Asian Currency Unit. Rising interdependence among Asian economies makes it vital for these economies to have a certain degree of exchange rate stability. However, the empirical evidence using an Asian Currency Unit suggests a widening deviation in exchange rate movements of the Asian currencies. The deviation has been driven by the adoption of different exchange rate regimes by the participating countries indicating diverse policy objectives. There are a number of institutions in the region that can assist exchange rate coordination and greater economic and financial integration. These institutions, including a multilateralized swap arrangement, a regional surveillance mechanism, and a bond fund; have to be significantly strengthened for them to play a role in fostering greater economic cooperation. The denomination of financial assets in the Asian Currency Unit in transactions involving these institutions would also enhance exchange rate cooperation.

Pegging in a coordinated way to a regional basket currency is considered by many as optimal for east-Asian countries. By contrast, according to existing empirical studies, these countries have most often relied on noncooperative United States dollar or G3 pegs. We show for the first time that by the late 1990s, with some reversals, a majority of east-Asian countries had already moved, de facto, away from the dollar peg and started targeting a basket, including east-Asian currencies (an Asian Currency Unit). Common-shock or market-based interpretations of such moves are ruled out since we document that, with few exceptions, countries in the region have in reality stuck to fixed exchange rates. We obtain such results using a Markov-switching estimation benchmarked against Bai-Perron structural break tests for the synthesis model of Frankel and Wei (2007), which augments the inference about currency weights in a basket with the weight on exchange-market pressure. In order to measure the latter, the forward positions of central banks in the foreign exchange market are taken into account.

This paper revisits the issue of exchange rate regimes in emerging Asia. It is divided into two main parts. The first part compares de jure and de facto exchange rate regimes in Asia over the decade 1999-2009. It finds that while Asia is home to a wide array of exchange rate regimes, there are signs of gradual movement towards somewhat greater exchange rate flexibility in many of the regional countries. However, the propensity for foreign exchange intervention and exchange rate management among regional central banks remains fairly high in many instances. Beyond a general reluctance of many Asian economies to allow for a benign neglect of their currencies both in terms of managing volatility as well as in terms of leaning against the wind, the sustained stockpiling of reserves in developing and emerging Asian economies since 2000 (interrupted only briefly by the global financial crisis) suggests that they are more sensitive to exchange rate appreciations than to depreciations. This is the focus of the second part of the paper. We find there to be evidence of an apparent fear of appreciation which is manifested in asymmetric exchange rate intervention - i.e., a willingness to allow depreciations but reluctance to allow appreciations. This policy of effective exchange rate undervaluation is rather unorthodox from a neoclassical sense, but is consistent with a development policy centered on suppressing the price of non-tradable goods relative to tradables (i.e., real exchange rate undervaluation). The paper concludes with a few observations on the management of Asian currencies in light of the global financial crisis and concerns about global imbalances.

Deepening market-driven economic integration in East Asia makes intraregional exchange rate stability across the region increasingly desirable and necessary. This paper suggests that East Asia's emerging economies begin with a currency basket system based on the G3 (US, Euro area and Japanese) or G3-plus (including emerging East Asian) currencies as a monetary policy anchor. This arrangement will enable all East Asian currencies to collectively appreciate vis-à-vis the US dollar, while maintaining intraregional rate stability, in the event of continuous surges of capital inflows to East Asia or a rapid unwinding of global payments imbalances. Such a system would contribute as an initial step to an East Asian monetary zone. After sufficient convergence and with stronger political commitment, East Asia may agree on more rigid intraregional exchange rate stabilization schemes through, for example, an Asian Snake or an Asian Exchange Rate Mechanism.