Michel Aglietta, Claire Labonne & Françoise Lemoine
"Exchange Rate Policy and Regional Integration in Asia"
La Lettre du CEPII N°307, January 2011, CEPII.
Asian foreign exchange markets are under pressure. Since 2007, good macroeconomic fundamentals, favourable growth prospects and high interest rates have made the emerging countries a favourite destination for capital. Though the crisis interrupted these flows at the end of 2008, the American monetary policy of "Quantitative Easing" accelerated the inflows of capital because it forced the emerging countries to raise their interest rates to combat inflation. Now, due to its increasingly integrated trade, price competitiveness and stable bilateral exchange rates are important factors in Asia's economic good health. The countries in the area intervene on the foreign exchange markets to prevent their currencies from appreciating. It is not just China that is resorting to this strategy; other countries have been much more active in bearing down on the exchange rate. How can the countries in the area maintain the stability of their exchange rates? As China is obviously the magnet for trade flows within the area, what role does the renminbi play in the exchange rate policies of the other Asian emerging countries? When we look empirically at these questions, we have to ask ourselves whether a de facto monetary area is forming and therefore whether there now exists a process of decoupling from the dollar. Can a loose monetary area form implicitly, without the coordination of regional monetary rules?