On The Choice Of Exchange Rate Regimes In Asia

Two incidents happened in the field of international finance in 1990s.The first one is most Asian countries and economies suffered serious losses in financial crisis that happened in 1997.The fact indicates that the old international currency system is not satisfactory any more and it must be reformed .The second one is the successful performance of European Monetary Union, which has led the trend of developing monetary bloc. Under the circumstances , Asia has intention to build its own currency bloc. The main purpose of this thesis is to study the feasibility of constructing Asian currency area (ACA) and what exchange rate regime Asia should choose given ACA as a long-term objective.The thesis comprises three chapters:Chapter one——"The theory of monetary integration and the practice of European currency integration".Firstly, the theory of monetary integration is reviewed systematically in this chapter. The development of the theory can be divided into two stages. Stage one: the theory of monetary integration was represented by the theory of optimum currency areas (OCA) before the middle of 1970s.The theory of this stage focused on the discussion of the feasibility and the criteria to realize monetary integration. Stage two: the theory of monetary integration is inclined to give more attention to the study of how to find a rational way to reach monetary union after 1970s. Therefore the theory of this stage is also called "theory of dynamic monetary integration".Secondly, the practice of European currency integration is described in this chapter. After analyzing the clue of European currency integration, the core element which facilitating the integration is found. The core element is that the enhancement of various countries' coordination reduces negative influence of dissymmetric shocks.The first chapter plays an important role in the whole thesis, which is the basis of making further analysis in the next chapter.Chapter two——"The reformation of Asia exchange rate regime".Chapter two is of great importance to the thesis, which can be separated into three parts.Part One is to study the Asian exchange rate regime in operation. The study shows that many Asian countries and economies de facto peg their currencies to the US dollar. Since Asian countries have become increasingly integrated through trade and capital flows, the exchange rate regime in operation is not appropriate for the development of Asia any more . The position of Japanese yen and US dollar in the exchange rate regime must be modified according to the rising influence of Japan.Part Two is to analyze the long-term objective of Asian exchange rate regime reformation. On one hand , both theory criteria and factual evidence show that it may not be possible to realize ACA in the short term. On the other hand , Asia should strengthen monetary cooperation and facilitate currency integration considering the changes of the international financial environment. Putting the two facets together, the author concludes: the construction of ACA should be the long-term objective of Asian exchange rate regime reformation. Part Three is to research what exchange rate regime Asia should choose in the short-term. After the study of the exchange rate regime of Asia in operation and in the long run, it is easy to give a qualitative description of Asian exchange rate regime in the short run logically. After the qualitative description, there goes the quantitative analysis. A simple game-theoretic model is used to develop a point that the lack of cooperation among Asian countries makes them broadly peg their currencies to the USD, while Asian countries may be better-off in weighing more the yen in their basket pegs .Chapter Two makes clear the Asian exchange rate regime between the short run and the long run. It demonstrates that cooperation could improve the welfare of Asian monetary authorities by raising the weight of the yen in their currency basket anchors.Chapter Three——"Asian currency cooperation and the attitude of C...