Monetary and Currency Policy Management in Asia

Monetary and Currency Policy Management in Asia

ADBI series on Asian Economic Integration and Cooperation

Edited by Masahiro Kawai, Peter J. Morgan and Shinji Takagi

This book makes concrete macroeconomic policy recommendations for Asian economies aimed at minimizing the impacts of an economic and financial downturn, and setting the stage for an early return to sustainable growth. The focus is on short-term measures related to the cycle. The three main areas addressed are: monetary policy measures to achieve both macroeconomic and financial stability; exchange rate policy and foreign exchange reserve management, including the potential for regional exchange rate cooperation; and ways to ease the constraints on policy resulting from the so-called ‘impossible trinity’ of fixed exchange rates, open capital accounts and independent monetary policy.

Chapter 9: A Proposal for Exchange Rate Policy Coordination in East Asia

Masahiro Kawai and Shinji Takagi

Subjects: asian studies, asian economics, economics and finance, asian economics, financial economics and regulation

Extract

Masahiro Kawai and Shinji Takagi 9.1 INTRODUCTION This chapter considers issues of exchange rate policy coordination for East Asia, a region that is becoming increasingly integrated both regionally and globally. Following the Asian crisis of 1997–1998, the region has experienced deepening integration in the context of recovery and expansion. Within the broad East Asia region including the Association of Southeast Asian Nations (ASEAN) member countries; the People’s Republic of China (PRC); Japan; Republic of Korea (henceforth Korea); Hong Kong, China; and Taipei,China, for example, the share of intraregional trade – measured by an average of export and import shares – rose from 37 percent from 1980 to 1990 to a peak of 53 percent in 2004 (though it declined to 50 percent in 2009). Closely related is intraregional foreign direct investment (FDI), which in 2000–2004 accounted for as much as half of the region’s total FDI (Hattari and Rajan 2008). Direct investment in plants and equipment has created production networks in some industries that cut across national borders. With increasing intraregional trade and the formation of production networks across borders, macroeconomic interdependence has strengthened, both within the region and with the rest of the world (ADB 2008). In our earlier work (Kawai and Takagi 2005a), we presented evidence to show that East Asia in the early 2000s was no less integrated than Western Europe in terms of the share of intraregional trade in total trade, the share of trade in total output, the degree of trade intensity between regional...

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