Prospects for Asian Exchange Rate Cooperation: Why an ERM Solution Might be the Most Palatable.

This paper re-assesses the prospects for greater exchange rate cooperation in East Asia in the wake of the Asian financial crisis of 1997–8. The crisis highlighted the inability of unilateral exchange rate mechanisms to deal adequately with the inflow of foreign capital and the absence of a common defensive mechanism to deal with speculative movements in exchange rates. Since 1997 there have been a number of initiatives to enhance monetary cooperation in the region including options for a common exchange rate system. We find that whilst a common monetary and exchange rate policy in East Asia is unlikely in the foreseeable future, until the net economic benefits of giving up unilateral exchange rate regimes are more apparent, a good case can be made for continuing to talk about such arrangements. In the early stages the prerequisites for exchange rate cooperation are not as demanding as for full monetary union, provided sufficient flexibility is built-in. Of the available options a solution along the lines of the former European Exchange Rate Mechanism might be politically the most appealing if the arrangements are flexible enough to leave countries initially with sufficient independence in macroeconomic policy, and it can build on European experience. [ABSTRACT FROM AUTHOR]