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Can the European Monetary System be a model for East Asian monetary cooperation?

2010; Routledge; Volume: 15; Issue: 2 Linguagem: Inglês

10.1080/13547861003700349

1469-9648

Hyoung‐kyu Chey,

European Monetary and Fiscal Policies

Abstract Since the 1997 Asian financial crisis and the launch of the European Economic and Monetary Union shortly afterward, a growing number of studies have considered the idea of a so-called Asian Monetary System, mostly adopting the European Monetary System as its model. The operational adjustment burdens in the European Monetary System were asymmetrically distributed, however, in particular between Germany and the other member countries. The emulation of such an asymmetric system in East Asia is not likely to be sustainable, due to the much lower support for regional integration there than was the case in Europe. For a future Asian Monetary System to be sustainable, it should be designed in such a way as to promote symmetry in the adjustment burdens arising from its operation. To this end, it may be desirable for the Asian Monetary System to employ an exchange rate and intervention mechanism that levies adjustment burdens largely on participant currencies deviating substantially from the average member currency movements. This mechanism should also be constructed in such a way that each currency's probability of identification as a deviant currency is similar. Keywords: Asian currency unitAsian Monetary SystemEast Asian monetary cooperationregional monetary unitJEL classifications: F33F55 Acknowledgements The author would like to thank Ouk-Heon Song, Young Kyung Suh, Yong Bok Kim, Michael C. Marking, Wosik Moon and seminar participants at the Bank of Korea for helpful comments. The views expressed here are those of the author only and should not be interpreted as representing the Bank of Korea or its policy. Notes 1. See, for example, Kawai and Takagi (2000) Kawai, M. and Takagi, S. 2000. 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International linkages between short-term real interest rates. The quarterly review of economics and finance, 36(4): 451–473. [Crossref], [Web of Science ®] , [Google Scholar], Uctum (1999) Uctum, M. 1999. European integration and asymmetry in the EMS. Journal of international money and finance, 18(5): 769–798. [Crossref], [Web of Science ®] , [Google Scholar], Camarero and Ordóñez (2001) Camarero, M. and Ordóñez, J. 2001. Who is ruling Europe? Empirical evidence on the German dominance hypothesis. Empirical economics, 26(4): 623–650. [Crossref] , [Google Scholar] and Laopodis (2001, 2004), argues that the asymmetry weakened in the later EMS period. The other group, of which Biltoft and Boersch (1992) Biltoft, K. and Boersch, C. 1992. Interest rate causality and asymmetry in the EMS. Open economies review, 3(3): 297–306. [Crossref] , [Google Scholar] and Bajo-Rubio et al. (2001) Bajo-Rubio, O., Sosvilla-Rivero, S. and Fernández-Rodríguez, F. 2001. 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The Bundesbank publicly declared that as a matter of principle, the divergence indicator would never be a standard for its own performance and that it would always give priority to internal monetary stability over external stability (Vaubel 1980 Vaubel, R. 1980. The return to the new European monetary system. Carnegie–Rochester conference series on public policy, 13: 173–221. [Crossref] , [Google Scholar], p. 187). 21. For instance, during the first year of the EMS, the Danish krone and the DM reached their intervention points in the parity grid system several times, without coming close to their divergence thresholds (Vaubel 1980 Vaubel, R. 1980. The return to the new European monetary system. Carnegie–Rochester conference series on public policy, 13: 173–221. [Crossref] , [Google Scholar], p. 185). 22. In contrast, a much more probable case was the situation in which only two currencies approached their bilateral fluctuation margins against each other, while appreciating and depreciating by the same respective degrees from the average for the other member currencies. In this case, the two extreme currencies could reach their bilateral fluctuation margins without passing their divergence thresholds (Vaubel 1980 Vaubel, R. 1980. The return to the new European monetary system. Carnegie–Rochester conference series on public policy, 13: 173–221. [Crossref] , [Google Scholar], pp. 185–186). 23. It was only after outbreak of the ERM crisis in September 1992 that Germany carried out intramarginal intervention (Gardner and Perraudin 1992 Gardner, E. H. and Perraudin, W. R. 1992. Asymmetry in the ERM: a case study of French and German interest rates since Basle-Nyborg, IMF Working Paper No. WP/92/96. Washington, DC: International Monetary Fund. [Google Scholar], pp. 4–5). 24. Germany increasingly accepted the use of the DM by other EMS countries for intramarginal intervention, and as a result, DM use for intramarginal intervention became prevalent (Rieke 1990 Rieke, W. 1990. "Alternative views on the EMS in the 1990s". In The European monetary system in the 1990s, Edited by: De Grauwe, P. and Papademos, L. 29–39. London: Longman. [Google Scholar], p. 30). However, Germany did so because EMS countries used their DM balances held on the Euromarkets, which had no effect on either the Bundesbanks' liabilities or the German monetary base (Mastropasqua et al. 1988 Mastropasqua, C., Micossi, S. and Rinaldi, R. 1988. "Intervention, sterilization and monetary policy in EMS countries, 1979–87". In The European monetary system, Edited by: Giavazzi, F., Micossi, S. and Miller, M. 252–291. Cambridge: Cambridge University Press. [Crossref] , [Google Scholar], pp. 258–259, 270). 25. According to the International Monetary Fund, the DM accounted for about 11% of identified international reserve holdings in the world in 1978. 26. Eurobarometer can be obtained at the website of the European Commission (http://ec.europa.eu/public_opinion/archives_en.htm). 27. The data are available, in Japanese, on the website of the Cabinet Office of Japan (http://www.cao.go.jp/index.html). 28. The data are available on the website of the Pew Research Center (http://pewresearch.org). 29. That Germany accepted this demand from EMS countries for more symmetric monetary cooperation was perhaps mainly due to German reunification, which had given Germany an incentive to alleviate doubts about its commitment to the European Community and multilateralism (Chang 2003 Chang, M. 2003. "Franco-German interests in European monetary integration: the search for autonomy and acceptance". In Monetary orders: ambiguous economics, ubiquitous politics, Edited by: Kirshner, J. 218–235. Ithaca: Cornell University Press. [Google Scholar], p. 225). 30. This issue becomes more complicated when the influence of the US on East Asian monetary cooperation is considered. For more on this issue, see Chey (2009a) Chey, H.-K. 2009a. The changing political dynamics of East Asian financial cooperation: the Chiang Mai initiative. Asian survey, 49(3): 450–467. [Crossref], [Web of Science ®] , [Google Scholar]. 31. See the cited references for detailed explanations of these properties of the divergence indicator system of the EMS. 32. In consumer price index terms, the inflation rates of South Korea, Japan, China and the 10 ASEAN countries between 2000 and 2005 averaged about 5%, a much lower level than the approximately 10% in ERM countries at around the time of EMS establishment (1975–1978). The probability that the introduction of such an AMS will lead member countries to face high inflation is thus unlikely to be great. 33. The Research Institute of Economy, Trade and Industry, an important Japanese think tank, publishes the AMU deviation indicators on its web page, adopting the work of Ogawa and Shimizu (2005) Ogawa, E. and Shimizu, J. 2005. A deviation measurement for coordinated exchange rate policies in East Asia, RIETI Discussion Paper Series No. 05-E-017. Tokyo: Research Institute of Economy, Trade and Industry. [Google Scholar]. These indicators show the degree of deviation from the theoretical benchmark rate for each of the East Asian currencies in terms of this AMU. 34. In 2008, the standard deviation of ASEAN+3 countries' shares in aggregate intraregional trade was about 8.2. That of their shares in aggregate intraregional nominal GDP was about 14.1, meanwhile, and that of their shares in aggregate intraregional GDP measured at purchasing power parity about 13.8. 35. How to allocate currencies' weights in an RMU is thus a critical issue for creation of an AMS using it. However, East Asian countries have reached no consensus on this issue and proposed different methods. In the 2006 ASEAN+3 Research Group study of an RMU, for example, the Japanese report (IIMA 2007) suggested the use of capital market openness as one standard for calculating currencies' weights in the RMU, while the South Korean report (Moon et al. 2007 Moon, W., Rhee, Y. and Yoon, D. . Paper presented at the wrap-up meeting of Researchers & Research Institute, 8 February. Regional currency unit in Asia: property and perspective, ASEAN+3 Research Group. [Google Scholar]) ignored capital market openness in its standard recommendations.