"Perfect" monetary and exchange rate strategies for East Asia may prove difficult to devise

• Author: Jeromin Zettelmeyer
• Position: IMF Research Department
• Pages: 318-320

Page 318

What are the prospects for East Asian monetary integration? A high-level conference on September 5-6 at Chulalongkorn University, Bangkok, provided a venue for two dozen distinguished speakers and discussants to examine the range of policy options. The conference, organized in cooperation with the universities of Paris-Dauphine and Mannheim and commemorating the thirtieth anniversary of Chulalongkorn's Faculty of Economics, drew approximately one hundred participants from academic, business, and policymaking communities as well as a large number of Chulalongkorn students.

The conference included lively sessions on specific country issues, such as macroeconomic policies in Thailand after the crisis and the future of multiple monetary systems in China in the face of increasing economic integration between Hong Kong SAR and the Chinese mainland, explored in a paper by Shu-ki Tsang of Hong Kong Baptist University. But alternative monetary and exchange rate regimes for East Asia provided the gathering with its central theme. The debate also addressed related issues, such as capital controls and international "last resort" lending.

Policy proposals

Notwithstanding the role of quasi-fixed exchange rates in the run-up to the Asian crisis and the apparent smooth functioning of Asian inflation targeting regimes, such as Thailand's (discussed in a paper by Chayodom Sabhasri, June Charoenseang, and Pornkamol Manakit of Chulalongkorn University), participants were generally skeptical of the long-term desirability of floating exchange rates for East Asia.

This skepticism appeared to be chiefly motivated by two considerations: the desirability of limiting exchange rate volatility from the perspective of regional economic integration, and the potentially destabilizing effect of exchange rate swings in emerging economies with short-term debt denominated in foreign currency.

Beyond this theme, however, little consensus emerged on which exchange rate regime might constitute the best alternative for the region. Discussion largely centered on three main proposals:

* Soft peg to a basket of currencies. A soft peg, argued Takatoshi Ito of Hitotsubashi University, could limit exchange rate volatility while maintaining a degree of flexibility, thus avoiding the types of misalignments that had preceded the Asian crisis (particularly in the case of the Thai baht). Ito noted that a soft peg could be achieved...