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N° 1997 - 14 |
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| October |
| Optimal Pegs for Asian Currencies |
| Agnès Bénassy-Quéré |
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It has been evidenced that the US dollar
is prominent in the exchange rate regimes of Asian countries. Through cross-country
estimations, we show that, in contradiction to the behaviour of European currencies
vis-à-vis the Deutschemark, the relative stability of Asian currencies against
the US dollar (until the 1997 crisis) cannot be justified by the theory of optimal
currency areas: trade integration between Asia and the United-States is not strong
enough, bilateral competition is not tough enough, and the macroeconomic shocks
affecting the two areas are too asymmetric. The peg to the US dollar then must
be explained in another way.
The analysis developed in the paper relies on the fact that Asian countries do not simply try to stabilise output, as assumed by the theory of optimum currency areas. Because growth heavily relies on the development of exports and on foreign direct investment, monetary authorities seem to stress the stability of the real effective exchange rate as the intermediate target. In such a framework, we show that pegging the US dollar is the result of the lack of regional monetary cooperation: each country chooses to peg the US dollar because this is the choice of its Asian partners. As North America and Asian partners other than Japan account for more than a half of foreign trade of each Asian country, this choice leads to a relatively stable external competitiveness. But yen/dollar fluctuations affect the value of the external debt. With a debt service of about 10% of GDP, a depreciation of the domestic currency by 10% increases the debt service by 1 point of GDP. Because this debt is denominated more in yen than in dollar (except in Malaysia), the countries as a whole would have an interest in weighing the yen in their basket pegs. But this would entail monetary cooperation at a regional level, which is still quite unlikely politically in the short run. |
Abstract |
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| F31, F33, F36 |
Keywords |
| optimum currency areas, international currencies, currency
pegs, Asia |
JEL classification |
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