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Finance sector development
Finance sector development
Finance sector development
Finance sector development
Fostering exchange rate coordination: the role of an Asian Currency Unit
Over the past few decades East Asia has become increasingly intertwined economically as the share of interregional trade in total trade has increased sharply across most economies, driven by regional supply chains and production networks. These production networks have also fostered greater investment links, with the production process being broken down into subprocesses within a particular industry. The high degree of economic integration indicates that there may be a case for exchange rate coordination, as exchange rate misalignments may result in loss of competitiveness for a country, possibly leading to an increase in protectionism, which in turn could promote a round of beggar-thy-neighbor devaluations. Large swings in bilateral exchange rates could influence decisions about the location of new and existing investments. In contrast, greater stability in exchange rates would support investment by increasing price transparency and reducing currency-related hedging costs for companies. Finally, sharp exchange rate movements in one currency could affect another country’s ability to maintain a particular exchange rate regime.
What makes an effective international financial safety net?
The global financial crisis showed the need for a large-scale and effective international financial safety net (IFSN). Although East Asia has had a regional financial arrangement (RFA) since 2000 (the Chiang Mai Initiative1), it was not tapped during the global financial crisis for a variety of reasons. Our recent study examines the requirements for an effective IFSN. It should have adequate resources to deal with multiple crises, be capable of making a rapid and flexible response, and not be encumbered by historical impediments such as the IMF stigma that would limit its acceptance by recipient countries. Oversight of the IFSN needs to be based on cooperation between global and regional forums, for example, in the case of Asia, the G20 and ASEAN+3.
East Asia can learn from Europe’s mistakes
The current European crisis has highlighted the policy mistakes that were made in the process of European financial and monetary integration. It has exposed major deficits in the eurozone’s institutional framework, including insufficient macroeconomic policy coordination and the lack of a crisis response mechanism (which then had to be negotiated in the midst of crisis). One of the major failures that led to the current European predicament was that national and European policymakers allowed the build-up of huge macroeconomic imbalances within the eurozone. Wages and prices in southern “periphery” countries (with Ireland being an honorary member of the south) rose much more quickly than in the northern “core” countries such as Germany. The resulting loss of economic competitiveness of the periphery countries has led to a growth crisis that fed into a sovereign debt crisis after government finances were severely strained during the global financial crisis.
New Challenges for Asia’s Central Banks
The current macroeconomic environment is far more unpredictable and difficult than just a few years ago. Asia’s central banks must evolve in order to adapt to this new landscape. Usually, a central bank’s role is to keep inflation low and stable. But with recent upheavals and financial market turmoil, they have also been charged with maintaining financial stability. To do this, central banks must increasingly work together and coordinate with other authorities. Such coordination—central to the region’s successful navigation of the 2008–2009 global financial crisis— does have implications for central bank objectivity. Central banks do not want to lose their often hard-won independence—an important factor in their operational effectiveness.
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