Strategies for Asian exchange-rate policy cooperation

Abstract

Asian economies have undergone significant transformation since the 1997-98 financial crisis. In order to reduce risks of a balance-of-payments crisis, Asian policy-makers introduced a number of reforms, including promotion of current account surpluses, accumulation of foreign reserves and some regional cooperation initiatives. These changes strengthened Asia's external sector fundamentals and helped Asia's ability to withstand external shocks. This chapter explores that currency integration should be the long-term goal for Asia. However, it is best to leave it to the market to decide whether the future currency system will be dominated by an 'Asian dollar', Japanese yen, Chinese yuan, Indian rupee or a dynamic basket of currencies. The Asian financial crisis was essentially a balance-of-payments crisis, although in some economies, such as Korea, it started from a domestic financial crisis. Internationalization of the Chinese yuan should help promote regional monetary cooperation, given the Chinese yuan's importance in regional exchange rate decisions.