Ulrich Volz

Lessons of the European crisis for regional monetary and financial integration in East Asia

The debt crisis in several member states of the euro area has raised doubts on the viability of European Economic and Monetary Union (EMU) and the future of the euro. While the launch of the euro in 1999 stirred a lot of interest in regional monetary integration and even monetary unification in various parts of the world, including East Asia, the current crisis has had the opposite effect, even raising expectations of a break-up of the euro area. Indeed, the crisis has highlighted the problems and tensions that will inevitably arise within a monetary union when imbalances build up and become unsustainable. This note discusses the causes of the current European crisis and the challenges that EMU countries face in solving it. Based on this analysis, it derives five lessons for regional financial and monetary cooperation and integration in East Asia.

Towards Monetary and Financial Integration in East Asia

Contents: Foreword by Richard N. CooperIntroductionProspects for Monetary and Financial Integration in East Asia: Dreams and DilemmasKoichi Hamada, Beate Reszat and Ulrich VolzPART I: THE POLITICAL ECONOMY OF REGIONAL INTEGRATION1. The ASEAN Economic Community and the European ExperienceMichael G. Plummer and Reid W. Click2. The Political Economy of the European Economic and Monetary Union Negotiations and Implications for East AsiaHeungchong Kim3. International Political Conflicts and Economic IntegrationKoichi Hamada and Inpyo LeePART II: DEVELOPING BOND MARKETS IN EAST ASIA4. Learning by Doing in Market Reform: Lessons from a Regional Bond FundGuonan Ma and Eli Remolona5. Currency Denomination in Asian Bond MarketsEiji Ogawa and Junko ShimizuPART III: EXCHANGE RATE POLICIES IN EAST ASIA: THE ROLE OF THE DOLLAR6. East Asias Role in the Revived Bretton Woods SystemMichael Dooley, David Folkerts-Landau and Peter Garber7. Current Account Surpluses and Conflicted Virtue in East Asia: China and Japan under the Dollar StandardRonald McKinnon and Gunther SchnablPART IV: TOWARDS MONETARY INTEGRATION IN EAST ASIA?8. Three Cases for Monetary Integration in East AsiaUlrich Volz9. Monetary and Exchange Rate Policy Coordination in ASEAN+1William H. Branson and Conor N. HealyPART V: CURRENCY BASKETS FOR EAST ASIA?10. Capital Markets and Exchange Rate Stabilization in East Asia - Diversifying Risk Based on Currency BasketsGunther Schnabl11. Asian Currency BasketsJohn Williamson12. The Role of an Asian Currency UnitMasahiro KawaiPART VI: THE ROLE OF CHINA13. The Illusion of Precision and the Role of the Renminbi in Regional IntegrationYin-Wong Cheung, Menzie D. Chinn and Eiji Fujii14. Institutional and Structural Problems of Chinas Foreign Exchange Market and the RMBs Role in East AsiaZhang Jikang and Liang YuanyuanReferencesIndex

All Politics Is Local: The Renminbi’s Prospects as a Future Global Currency

Recent years have seen a heated discussion over Chinese capital account liberalization and internationalization of China’s currency, the renminbi (RMB). Against the backdrop of a weak U.S. economy and China’s growing international economic clout, there has been speculation about the RMB replacing the U.S. dollar as the world’s leading currency. Subramanian (2011: 1), for instance, maintains that “the renminbi could become the premier reserve currency by the end of this decade, or early next decade.” Much of the current discourse recalls past discussions when other currencies, especially the Japanese yen (Burstein 1988; Kwan 1994; Taguchi 1994) and the Euro (Chinn and Frankel 2007), were seen as candidates to “dethrone” the dollar.

RMB internationalisation and currency co-operation in East Asia

This paper scrutinises the state of RMB internationalisation and its likely progress over the coming years and discusses its implications for currency co-operation in East Asia. As part of its internationalisation, the RMB is gradually delinked from the dollar, which will effectively put an end to the East Asian dollar standard that has shaped the regions financial architecture over the last three decades and that has provided a relatively high degree of intra-regional exchange rate stability. Because of the close trade and investment ties that have developed across the region, the East Asian countries, especially the ASEAN countries which are striving to create an ASEAN Economic Community, will continue to manage their exchange rates and stabilise their currencies against one another to facilitate cross-border investment and commerce. But instead of a replacing of the dollar standard with an RMB standard we are likely to see some rather loose and informal exchange rate co-operation in East Asia based on currency baskets, with China herself moving towards a managed exchange rate system guided by a currency basket.

On the Future of Inflation Targeting in East Asia

This article analyzes the problems associated with inflation targeting (IT) regimes in a number of East Asian countries. It scrutinizes the policy conflicts that can arise when a central bank that has adopted a formal inflation target to guide the conduct of monetary policy simultaneously manages the exchange rate and pursues financial stability objectives. To this end, it empirically investigates the importance of exchange rate and terms of trade movements as determinants of inflation rates across East Asian economies and discusses the role of central banks in guarding financial stability and the ways this may conflict with an IT regime. The article argues that IT never really has been a suitable monetary framework for East Asian countries and that it should hence be supplanted by transparent monetary frameworks that explicitly recognize the multiple goals that are being pursued by East Asian central banks.

China and Global Imbalances from a View of Sectorial Reforms

This article examines the impact of sectorial reforms on current account imbalances, with a special focus on China. In particular, we investigate to what extent reforms pertaining to the financial sector, social protection, and healthcare may contribute to a rebalancing of Chinas persistent current account imbalances. Our forecasting results suggest that reforming the financial sector would be a significant contributor to the countrys rebalancing with an effect much larger than that of capital account liberalization. Strengthened provisions of social protection and publicly‐funded healthcare are also found to contribute to a rebalancing of the Chinese economy.

Financial Regionalism in East Asia

This article provides an overview of the current state of financial regionalism in East Asia and discusses why and how the East Asian countries should go forward in terms of financial and monetary regionalism. It highlights intra-regional exchange rate stability as an important regional public good and makes the case for greater exchange rate cooperation. To this end, East Asian countries should gradually reduce their exposure to the US dollar and move towards currency basket regimes which would sustain relative intra-regional exchange rate stability while allowing for sufficient flexibility to accommodate idiosyncratic shocks. Against the backdrop of the global and European financial crisis, the article also urges a reconsideration of the costs and benefits of international – and regional – financial integration and calls for a further strengthening of East Asias regional financial architecture.

The People’s Republic of China and Global Imbalances from a View of Sectorial Reforms

This paper examines the impact of sectorial reforms on current account imbalances, with a special focus on the People’s Republic of China (PRC). In particular, we investigate to what extent reforms pertaining to the financial sector, social protection, and healthcare may contribute to a rebalancing of the PRC’s persistent current account imbalances. Our forecasting results suggest that reforming the financial sector would be a significant contributor to the country’s rebalancing with an effect much larger than that of capital account liberalization. Strengthened provisions of social protection and publicly-funded healthcare are also found to contribute to a rebalancing of the PRC economy.

Bond Yield Spillovers from Major Advanced Economies to Emerging Asia

This paper explores the extent to which changes to long-term interest rates in major advanced economies have influenced long-term government bond yields in Emerging Asia. To gauge long-term interest spillover effects, the paper uses VAR variance decompositions with high frequency data. Our results reveal that sovereign bond yields in Emerging Asia responded significantly to changes to US and Eurozone bond yields, although the magnitudes were heterogeneous across countries. The size of spillovers varied over time. The pattern of these variations can partially be explained by the implementation of different unconventional monetary policy measures in advanced countries.

Toward the Development of a Global Financial Safety Net or a Segmentation of the Global Financial Architecture

ABSTRACT This article examines the prospects for the development of a comprehensive global financial safety net (GFSN). It discusses the optimal layout of the GFSN, comprising the International Monetary Fund, regional financing arrangements (RFAs), as well as bilateral or multilateral central bank swap arrangements, and the relationship between these. It then briefly reviews and appraises the current structure and functioning of these different layers of the GFSN and discusses the need and scope for strengthening cooperation between RFAs and the IMF. It argues that the GFSN is still very patchy and there is little reason to expect significant progress in better collaboration between RFAs and the IMF as long as the latter’s governance structure is not significantly revamped. Indeed, risks are that the GFSN will become even more fragmented with the further development of the European Stability Mechanism, and the emergence of the BRICS Contingent Reserve Arrangement. To prevent a further fragmentation of the GFSN, substantial governance reform of the IMF is urgently needed.