Monetary and Currency Policy Management in Asia
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Monetary and Currency Policy Management in Asia

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.
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Chapter 5: Macroeconomic Impacts of Foreign Exchange Reserve Accumulation: Theory and International Evidence

Shin-ichi Fukuda and Yoshifumi Kon


Shin-ichi Fukuda and Yoshifumi Kon 5.1 INTRODUCTION Beginning in the late 1990s, a dramatic accumulation in foreign exchange reserves has been widely observed in emerging market and developing economies. As a result, by 2005 foreign exchange reserves of emerging market and developing economies, primarily in Asia and the Middle East, far exceeded those of industrial economies (Figure 5.1). During the Asian crisis of 1997–98, emerging market and developing economies with smaller liquid foreign assets had difficulty averting panic billions of SDRs 2500 Emerging and developing economies 2000 1500 1000 500 0 1980 Advanced economies Asia PRC Middle East 1985 1990 1995 2000 2005 Notes: PRC = People’s Republic of China; SDRs = Special Drawing Rights. Emerging market and developing economies include the PRC. Asia includes the PRC, but not Japan. Monthly, end of period. Source: International Monetary Fund (2006). Figure 5.1 Total reserves minus gold in emerging market and developing economies 1980–2005 120 M2840 - KAWAI 9780857933348 PRINT.indd 120 24/01/2012 13:18 Macroeconomic impacts of foreign exchange reserve accumulation 121 in the financial markets and preventing sudden reversals in capital flows (see, for example, Corsetti et al. 1999; Sachs and Radelet 1998). Many emerging market and developing countries thus have recognized the importance of increased liquidity as a form of self-protection against crises. Replacing liquid, short-term debt with illiquid, long-term debt was a popular policy recommendation, at least initially. Ultimately, however, the course of action that most emerging market and developing economies took more seriously was raising foreign reserves. The...

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