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A Roadmap of Monetary Cooperation in East Asia

A Roadmap of Monetary Cooperation in East Asia. Haihong Gao 高 海红 gaohh@cass.org.cn Institute of World Economics and Politics, Chinese Academy of Social Sciences NEAT Conference, Shanghai, April 7-8 2007. Questions to discuss.

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A Roadmap of Monetary Cooperation in East Asia

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  1. A Roadmap of Monetary Cooperation in East Asia Haihong Gao 高 海红 gaohh@cass.org.cn Institute of World Economics and Politics, Chinese Academy of Social Sciences NEAT Conference, Shanghai, April 7-8 2007

  2. Questions to discuss • Theoretically, to what degree the member countries of the CMI are integrated economically and financially? How far can the member countries of the CMI move towards a regional monetary regime? • Practically, what are the obstacles for establishing a monetary arrangement for CMI member countries? • A roadmap: if that forming a monetary union is a commonly accepted view in the long-term, what would the timeline be like?

  3. Background Efforts made by the policy-makers since 1997: • “Asian Monetary Fund (AMF)” proposal (1997): aborted • “Manila Framework Group (MFG)”(1997): suspended • “Chiang Mai Initiative (CMI)” (2000): reviewed ( 2004-2005) and enhanced (2005) • “Asian Bond Fund” (2003): ABF1; ABF2 Efforts made by academics: • BBC and lately updated as a proposal of Currency Basket (Willianson 2005) • AERM proposal • G-3 Basket proposed ( Ito, Ogawa and Sasaki 1998 , Ogawa 2002)

  4. Theoretical estimation • Review of the OCA theory • G-PPP and how it is incorporated with OCA • Methodology • Six groups: ASEAN+3 ( USA and Japan as base countries respectively) A.   “ASEAN+3” (USA as the base country) B.   “ASEAN+3” (JP as the base country) C. “+3”: China, Japan and Korea (USA as the base country) D.  “+3”: China, Japan and Korea (JP as the base country) E.ASEAN, Japan and Korea (USA as the base country), and F.ASEAN, Japan (base country) and Korea

  5. Results of multi-variable cointegration and summary of the findings • Five groups, out of six in total, appear to have significant evidence of the existence of OCA. • “ASEAN+3” (group A and B): positive result, indicating that their real exchange rates share common trend due to their highly interrelated underlying fundamental variables • The only negative result is found in group C, China, Japan and Korea (USA is as the base country) • “+3” (group D): G-PPP holds for China, Japan and Korea, Japan is as the base country • In the case of excluding China (group E and F), the evidence for ASEAN, Japan and Korea, both of the USA and Japan as the base country, is positive. A puzzling result, seemingly to be against the fact of China’s strengthening involvement with regional trade and financial integration.

  6. Divergent views between economists and policy-makers • The supportive views are mainly from academics • Policy-makers are more cautious: put the monetary cooperation at the far end of political agenda • What are the major concerns from the practical point of view on the regional monetary cooperation?

  7. Practical barriers • Weak institutional capacity • Lack of common objective in monetary sphere • Weak surveillance • US dollar’s dominant role • Lack of leadership and political will

  8. Timeline of forming a monetary union We divided the timeline for forming a monetary union in East Asia into three stages: short-term (in 3-5 years time) medium-term (in 10-15 years time) long-term

  9. Roadmap of Monetary Cooperation in East Asia

  10. Conclusions • Do the member countries of the CMI have potentials to form an OCA? Yes! • How far can the CMI member countries move towards a monetary arrangement? It depends on to what extent and how soon the countries reduce the barriers. • The roadmap designing is to a large degree a matter of policy consideration, and political decision is the key element determining the speed and format of regional monetary cooperation • The long-term view of a currency union is important, but, to realize it, it’s a long way to go.

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