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N° 2000 - 10 |
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| June |
| Big and Small Currencies: The Regional
Connection |
Agnès Bénassy-Quéré
Benoît Coeuré |
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This paper is an exploration
of the regional dimension of the new international financial architecture in the
light of the debate on "two corner" solutions for exchange rate regimes,
which advocates either free floating or currency boards (or dollarization) as
the only sustainable regimes.
The first section deals with the evolution of the international monetary
system (IMS) after 1997-1998 currency crises in emerging countries, as compared with the situation which prevailed prior to the Asian crisis.
De facto exchange rate regimes are examined through the implementation of a new econometric methodology based on a method of moments. The implicit
pegs of 111 currencies are estimated on weekly data over two periods (pre and post crises). Our results show that the proportion of currencies with
de facto pegs on the US dollar is much higher and persistent than the share of the official pegs reported by the IMF. This is the case even
after the Asian crisis, which suggests that the current system is much more resilient to shocks than it is usually thought, at least in the short
run. Conversely, free floating appear much less frequent than claimed officially, whereas pegs on the euro are a significant minority. We conclude
that the IMS is not moving towards a generalized free floating system, and it is still far from being organized around equally sized currency
blocks.
The second section explores the possibility of regional solutions for exchange-rate regimes. We argue that once the regional dimension is accounted
for, there are more than two corner solutions. Indeed, the regional dimension adds two extra corners: the regional monetary union, and the union with
a key currency --the dollar, the euro or the yen. Even though these corners are only long run solutions, they radically modify the terms of the choice
of an exchange-rate regime even in the short run, in two ways. First, the "two corner" solutions may become an obstacle if the long
run goal is a monetary union. Second, the perspective of a monetary union in the long run can make intermediate regimes more robust in the mean
time, when these regimes are properly defined and managed through regional cooperation.
The transition towards regional corners is studied in the third section. A distinction is made between countries around the euro zone (Central
and Eastern Europe, Mediterranean countries) and highly self-integrated emerging regions such as East Asia (without Japan) or South America. Monetary
cooperation is little necessary in the former case whereas it is crucial in the latter one, perhaps in the form of soft pegs on common baskets.
Monetary cooperation needs mutual confidence at the policy level, which these regions lack, despite many experiments in this field. Hence, backing
regional intermediate regimes would require strong commitments. Developing economic policy coordination and mutual surveillance would undoubtedly
support a regional system, as it was the case in the European monetary system. However the anchor of regional systems would likely remain extra-regional
currencies in the short run, contrasting with the European case. Finally, the International Monetary Fund should accompany this evolution through
increasing the regional dimension of its surveillance. |
Abstract |
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| Exchange rate regimes, currency blocks, emerging
countries |
Keywords |
| F33 |
JEL classification |
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Full text (pdf)
Annexes |
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