The Research On Exchange Rate Coordination In East Asia

Starting from the current situation of foreign exchange rate volatility in East AsiaEconomies, backing to the choice of exchange rate regime, supported by the idea ofcoordination, this is what the paper follows. First of all, as a reality, East AsiaEconomies’ exchange rate regime pegged to the dollar has been confirmed. Andunder the premise of pegged to the dollar, the exchange rate of East Asia Economiesshould show a correlation basing on the idea of “transfer”.Then, how about thereality? How about the correlation in the short-term and long-term? Whether theexchange rate correlation in East Asia Economies can last? Does there have formed apotential Optimal Currency Areas with exchange rate linkage? And if it does, how doEast Asia Economies choose their exchange rate regime? With empirical tests andtheoretical analysis, this paper will answer these questions.Actually, thinking these problems start from the establishment of the Euro Zone.The writer thinks that there is an idea of exchange rate coordination in Europeancountries. From European countries claiming to establish the gold standard to Britainputting forward “Keynes plan” after Word War Ⅱ, from the countries coordinatingexchange rate spontaneously within Bretton Woods system to European countriesestablishing “Snake in the Tunnel” after the system collapse, from EuropeanMonetary System to setting up Euro Zone, exchange rate coordination is always inthere, which has transfer to exchange rate cooperation. The thought of exchange ratecoordination, which is complement with European trade integration, has provided animportant realistic foundations as well as institution guarantee for establish ofEuropean Union and Euro Zone. This kind of exchange stability which is based onexchange rate coordination is a forerunner of the European Monetary Union (EMU).We can also say exchange stability among European countries is the prerequisites forestablishing EMU. Based on this logical, this paper has also clarifies whether therecan compose an Optimal Currency Area within exchange rate stability—spontaneous exchange rate coordination—of East Asia Economies.Firstly, this paper gives a brief overview of the current situation of regionalmonetary and financial cooperation in East Asia after the financial crisis, includingestablishing systems for East Asia regional information communication and warning,activating CMI and CMIM, developing East Asia Bond Market etc. And then thispaper focus on the present progress that East Asia regional exchange rate coordinationhas made. From a practical point of view, there is no institutional coordination ofexchange rate. What’s more, the establishment of Asian Montary Unit, which hasonly been a general index on measuring the exchange rate changes of economics, hasno substantial force to promote exchange rate coordination in East Asia for furtherdevelopment. Lastly, the crisis made East Asia economies realize the importance andurgency for regional economic cooperation. However, the main barrier to East Asiaregional cooperation is relying on the dollar system and absolute influence ofAmerican hegemony. Then this paper comes to the relationship between the dollarsystem and spontaneous exchange rate coordination of East Asia economies. Andpoint out two paradoxes about exchange rate coordination of East Asia regionalEconomies:Firstly, the dollar system and American hegemony is the important reason forimpeding East Asia economies exchange rate coordination. But because of pegged tothe dollar, East Asia economies exchange rate has shown some linkage. Secondly, thetrade of East Asia economies is affected by pegged to the dollar. They hope to reducethe negative effect from the dollar exchange rate fluctuations, but have to export largetrade surplus and exchange reserves to America. Because of that, they have to rely ondollar assets and U.S. capital markets, and thus further consolidate the peg currencyregime. Supporting the dollar system but suffering from it, wanting to get the dollarsystem off, but having to cooperate under it, the status of East Asia economies isembarrassed.McKinnon thought that the establishment of the dollar system is only a matter ofchance,while Hudson point out that the current international monetary systemdominated by the dollar is designed by U.S. From the perspective of economic history,the dollar hegemony originated from the Bretton Woods System. And thanks to thecommodity-dollar and petro-dollars reflux mechanism and bond in dollars, the dollar’s status is reinforced after the collapse of Bretton Woods System instead ofdecline.Thus the dollar hegemony is supported by commodity dollar refluxmechanism, that is, the East Asia economies is an important supporter to the dollarhegemony,which means the East Asia adopted pegged to the dollar exchange rateregime.Although the official of East Asia economies claimed that they take themanaged floating exchange rate system.The dollar’s status is never shaken, which hasbeen confirmed through a variety of empirical test.So, based on transmission effect, East Asia economies should have a character ofexchange rate linkage within pegged exchange rate. Based on that, this paperempirically analyses the correlation of East Asia economies exchange rate andexchange rate changes basing on G-PPP theory. And it shown that there is exchangerate linkage which has non-institution constrains in East Asia economies, no matter inlong-term or short-term. It also means that there is spontaneous exchange ratecoordination in East Asia economies, and that provides theoretical basis andexperience supports for exchange rate cooperation, even establishing the OptimumCurrency Area in East Asia region. However, that linkage of exchange rate is underthe premise of pegged to the dollar and guaranteed by the close trade links betweenEast Asia economies, similar industrial structure and trade structure, convergence ofeconomic cycles and macroeconomic policies. That is, under the premise ofcommodity dollars reflux mechanism and regional economic growth in East Asia, thisexchange rate linkage feature can last for a long time.Based on East Asia economies spontaneous exchange rate cooperation, thispaper examine whether they can composed an Optimum Currency Area. First of all,this paper uses a numerical method to analyze the adjustment cost of macroeconomicpolicy caused by composing Optimum Currency Area. Then the writer tested the EastAsia economies’ standard such as mobility of factors, economic openness, productdiversification, financial integration, similarity of inflation and policy integration. Theresults show that the East Asia economies Optimal Currency Area criteria test are notsatisfied.This maybe because of the feasibility and effectiveness of standard’s choiceand the special conditions for East Asia economies. So, from the perspective of EastAsia economies integration, this paper analyzed whether there is an afterwardsOptimum Currency Area.In the long run, East Asia economies spontaneous exchange rate region had the condition to establish the Optimum Currency Area and thepossibility to promote a higher lever of cooperation.At the end of this paper, this paper discussed the long term arrangement of EastAsia regional exchange rate coordination and cooperation. Eichengreen claims thatany intermediate exchange rate regimes can eventually transfer to float exchange rateregimes or fixed exchange rate regimes. However, from a practical point of view, thedollar system is still a major constraint. So RMB should be a regional stabilizer ofEast Asia, based on East Asia economies spontaneous exchange rate coordination.Meanwhile, the leadership of China, Japan, even U.S. should be clarified in regionalcooperation. What’s more, in a short time, the exchange rate linkage in East Asiaeconomies should be strengthened. In a medium time, consolidating the results of theexisting monetary and financial cooperation which East Asia had achieved, andcoordinated the relationship between China and Japan.In a long time, from East Asiasub-regional exchange rate coordination to promote regional cooperation, andultimately achieve monetary integration in East Asia.The main conclusions of this paper are as follows:(1) Within East Asia economies pegged to the dollar, the economies show somecharacters of exchange rate linkage, and made a spontaneous exchange ratecoordination region.(2) This exchange rate linkage was premised on pegged to the dollar, ensured byclose trade connection, similar industrial structure and trade structure, convergingeconomic cycle and macroeconomic policy in East Asia economies.(3) Under ensuring the dollar system and East Asia regional economic growth,this exchange rate linkage feature will last for a long time.(4) East Asia region which has spontaneous exchange rate coordination alreadymeet part of the Optimal Currency Areas standards, which have the possibility topromote a higher level of cooperation.(5) In a short time, the exchange rate linkage in East Asia economies should bestrengthened. In a medium time, consolidating the results of the existing monetaryand financial cooperation which East Asia has achieved, and coordinating therelationship between China and Japan.In a long time, from East Asia sub-regional exchange rate coordination to promote regional cooperation, and ultimately achievemonetary integration in East Asia.