Integration in the Global Economy
New Horizons in Money and Finance series
Edited by Suthiphand Chirathivat, Emil-Maria Claassen and Jürgen Schroeder
Chapter 12: Costs and benefits of a common currency for the ASEAN
Srinivasa Madhur 12.1 INTRODUCTION The 1997 Asian financial crisis has brought into sharp focus questions about appropriate exchange rate regimes for the economies in the region. In the aftermath of the crisis, with the notable exception of Malaysia, many countries in the region have now shifted toward greater flexibility in their exchange rates, although, for various reasons including the ‘fear of floating’, official interventions in the foreign exchange market to stabilize rates are not uncommon. While these countries are experimenting with changes in the exchange rate regimes, a lively debate is continuing on the choice of appropriate exchange rate regimes for developing countries. Since the Asian crisis, a popular view among academic economists and policymakers is that developing countries with open capital accounts have a bipolar solution to the exchange rate dilemma they face: a free float or a hard peg. This chapter assesses the costs and benefits of a hard peg, specifically the use of a common currency or formation of a monetary union, for the Association of Southeast Asian Nations (ASEAN). Given that the adoption of a common currency, or the formation of a currency union, was the last step in a sequence of policy initiatives toward regional economic integration in Europe that spanned more than four decades, theASEAN may perhaps be a long way away from adopting a common currency. Yet, a debate on the adoption of a common currency by these countries is slowly emerging especially in the aftermath of the Asian crisis and after the...
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