Exchange Rate Regimes and Macroeconomic Management in Asia

Exchange Rate Regimes and Macroeconomic Management in Asia

Tony Cavoli
Ramkishen S. Rajan
Copyright Date: 2009
Pages: 248
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  • Book Info
    Exchange Rate Regimes and Macroeconomic Management in Asia
    Book Description:

    With the rise of China, India and the re-emergence of East Asia from the financial crisis of 1997–98, monetary issues in Asia have acquired great significance as the region holds the largest reserves in the world and consequently plays a major role in the global macro-economy. In addition, there are also a great variety of monetary policy regimes at play in the region – reflecting each country's needs and policy preferences. This volume explores monetary, exchange rate and macroeconomic policies in Asia. A particular question that is analysed is Asia's experience since the crisis with the use of monetary policy to manage the resurgence in capital inflows. It also examines the theoretical and policy issues associated with international capital flows, the increasing degree of integration of financial markets and exchange rates for emerging Asian economies. The book is unique in focussing on China, India and Southeast Asia, rather than just having a sub-regional or country-specific focus. Rigorous empirical analysis is applied to important practical policy issues. The book also provides accessible overviews of recent research relevant to the questions that are explored and is written throughout in a manner that is accessible to policy makers, students and business/financial journalists.

    eISBN: 978-988-8052-25-7
    Subjects: Economics

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Foreword
    (pp. vii-viii)
    Thomas D. Willett

    Asian currency and financial developments are no longer relevant just for area specialists. This was dramatically brought home by the global repercussions of the Asian crises in 1997–98. While Asian financial relationships with the rest of the global economy are much quieter now, there are some striking parallels between the situation of the United States today and many of the Asian economies in the years just before the crises hit. Large current account deficits financed by huge capital inflows and problems in domestic financial systems that had been allowed to go unchecked for much too long are the most...

  4. Preface and Introduction
    (pp. ix-xii)
  5. Acknowledgements
    (pp. xiii-xiv)
    Tony Cavoli and Ramkishen S. Rajan
  6. Section 1: Exchange Rate Regimes and Monetary Frameworks in Asia
    • 1 Asian Exchange Rate Regimes A Decade since the 1997–98 Crisis
      (pp. 3-38)

      An immediate lesson that many observers appear to have drawn from the financial crises in emerging market economies in the1990s is that the only viable exchange rate option boils down to one between flexibility on the one hand, and “credible pegging” on the other. According to this view (which was dominant in the late 1990s and early 2000s but still has a number of followers), emerging economies have to gravitate to one of these two extremes. Any currency arrangements that lie in between these polar extremes or corners (i.e., those in the “middle”) are viewed as being inherently unstable and...

    • 2 Open Economy Inflation Targeting Regimes in the Crisis-hit East Asian Economies
      (pp. 39-50)

      The supposed bipolar view of exchange rates ought to be presented as a choice between a hard peg versus a “more flexible regime” rather than a flexible exchange rate regime per se.² The latter option implies the absence of any explicit exchange rate target, i.e. intervention should not be framed primarily in terms of defending a particular exchange rate target. Such targets inevitably tempt speculators by offering them the infamous one-way option. Exchange rate and monetary policy strategies must therefore involve a “fairly high” element of flexibility rather than a single-minded defense of a particular rate. One way this flexibility...

    • 3 Estimating Monetary Policy Rules for Selected Asian Economies
      (pp. 51-62)

      One of the dominant issues surrounding the choice of monetary and exchange rate policy in Asia is that of the role of the exchange rate and what policy the crisis-affected countries, viz. Korea, Thailand, Indonesia, Malaysia and the Philippines, actually implemented after the crisis. The conventional view is that these countries made their policy choices on the basis of the “bipolar view”, that is, intermediate regimes are inherently crisis-prone and that the best choice is to head for the extremes. In terms of de jure monetary policy regimes, Korea, Thailand, Indonesia and the Philippines chose the floating corner by electing...

    • 4 Estimating the Flexibility of the Indian Rupee
      (pp. 63-74)

      While there has been a proliferation of recent research on exchange rate regimes focussing on East Asia, scant attention has been paid to India, which is a large and rapidly growing economy and is gradually integrating with the global economy (Figure 1 summarizes trends in India’s balance of payments). While it is generally believed that the Reserve Bank of India (RBI) targets the real effective exchange rate or REER, at least over the medium term,² this chapter focuses on the degree of de facto exchange rate flexibility of the Indian rupee (INR). How flexible is the INR, and to the...

    • 5 Characterizing Singapore’s Exchange Rate Policy
      (pp. 75-88)

      Like India, Singapore is another notable managed floater in Asia. Officially, the Monetary Authority of Singapore (MAS) has been targeting its nominal effective exchange rate or NEER (around a band) since 1981. The manner in which Singapore operates its exchange rate regime is of particular interest at a time when a number of other countries in the region, including China and Malaysia, are gradually introducing greater exchange rate flexibility by adopting currency basket regimes (for instance, see Hilsenrath and Kissel, 2005).

      In this chapter we are interested in exploring a number of questions pertaining to the Singapore dollar (SGD), including:...

  7. Section 2: International Capital Flows, Financial Integration and Macroeconomic Management in Asia
    • 6 Capital Inflows Surges and Monetary Management in East Asia Pre-Crisis
      (pp. 91-106)

      The East Asian financial crisis of 1997–98 was due in no small part to an initial surge in international capital flows in the early 1990s which halted abruptly and in fact reversed direction in 1997–98. While the causes and consequences of the “sudden stop” of capital flows have been discussed elsewhere (for instance, see Rajan and Siregar, 2002), less well understood are the factors motivating the precrisis capital inflow boom in the 1990s prior to the bust.

      Referring to IMF data in Table 1, it is apparent that the bulk of capital inflows into the region in the...

    • 7 International Capital Flows in East Asia: Trends, Patterns and Policy Issues
      (pp. 107-130)

      While the region’s rapid recovery underscores the overall resilience of the East Asian economies, there has been a shift in the nature of their engagement with the rest of the world. In particular, since the financial crisis of 1997–98 and the subsequent sharp capital outflows from economies in East Asia, the region has been running persistent current account surpluses. The region has consequently become a net exporter of capital to the rest of the world while still depending very heavily on gross financing from the rest of the world. Another noteworthy dimension to the cross-border flow of funds has...

    • 8 International Capital Flows and Macroeconomic Policy Options for Small and Open Asian Economies
      (pp. 131-144)

      Emerging Asia has benefited greatly by being relatively open to global trade and financial flows. However, this openness also leaves the region somewhat vulnerable to a variety of external shocks that could spillover to the domestic economy. How should monetary authorities respond to various exogenous shocks, and what does the response depend on? This is the set of questions explored in this chapter within the context of a simple analytical framework. The framework to be used is a modified version of the age-old Swan diagram that has recently been revisited by Adams (2006), Frankel (2001) and Rajan (2006), among others.²...

    • 9 Financial Integration in East Asia: What Does the Literature Tell Us
      (pp. 145-168)

      How financially integrated are the East Asian economies? Despite numerous empirical studies examining various facets of the topic, the degree of intraregional financial integration in East Asia remains a matter of vigorous debate. This chapter offers a selective survey of the recent empirical literature on financial integration, the focus being on alternative definitions of financial integration and measurement issues and results. The chapter concentrates on the ASEAN–5 plus 3 or APT economic group (i.e. Indonesia, Thailand, Malaysia, Philippines, Singapore, Korea, China and Japan), as well as Hong Kong and Taiwan. These are the economies that have consciously attempted to...

    • 10 What Is the Degree of Monetary Integration between Mainland China and Hong Kong?
      (pp. 169-188)

      When one thinks about the relationship between Mainland China and Hong Kong, the phrase “one country, two systems” is invariably the first thing that comes to mind (Takeuchi, 2006). It is well known that this principle, which has been enshrined under the territory’s Basic Law, refers to the fact that although Hong Kong is part of Mainland China (i.e. no political independence), it has complete autonomy in terms of economic policy-making. For instance, in the case of monetary and financial policies, the Hong Kong Monetary Authority (HKMA) is independent of the People’s Bank of China and Hong Kong can maintain...

  8. Notes
    (pp. 189-208)
  9. References
    (pp. 209-228)
  10. Subject Index
    (pp. 229-234)