Exchangerate arrangements and financial integrati

Authors: Hans Genberg

Publish Date: 2006/11/16

Volume: 3, Issue: 3-4, Pages: 359-377

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Abstract

Financial integration in East Asia is actively being pursued and will in due course lead to substantial mobility of capital between economies in the region Plans for monetary cooperation as a prelude to monetary integration and ultimately monetary unification are also proposed These plans often suggest that central banks should adopt some form of common exchange rate policy in the transition period towards full monetary union This paper argues that this is a dangerous path in the context of highly integrated financial markets An alternative approach is proposed where independent central banks coordinate their monetary policies through the adoption of common objectives and by building an appropriate institutional framework When this coordination process has progressed to the point where interest rate developments are similar across the region and if in the meantime the required institutional infrastructure has been build the next step towards monetary unification can be taken among those central banks that so desire The claim is that this transition path is likely to be robust and will limit the risk of currency crisesRegression results using weekly data from 2000 to 2005 The estimated equation has the logchange in the US dollar value of the currency in the first column as the dependent variable and the logchange in the euro the yen and the won as the dependent variable except as noted in the table

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