2001 Fiscal Year Final Research Report Summary
Optimal Exchange Rate Systems and International Coordination in East Asia
| Project/Area Number |
12630096
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| Research Category |
Grant-in-Aid for Scientific Research (C)
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| Allocation Type | Single-year Grants |
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| Section | 一般 |
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| Research Field |
Public finance/Monetary economics
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| Research Institution | Hitotsubashi University |
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Principal Investigator |
OGAWA Eiji Hitotsubashi University, Graduate School of Commerce and Management, Professor, 大学院・商学研究科, 教授 (80185503)
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| Project Period (FY) |
2000 – 2001
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| Keywords | Exchange Rate System / Exchange Rate Policy / Two-country model / Coordination Failure / Dollar Peg / Currency Basket System |
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| Research Abstract |
This research project extended a model of Ito, Ogawa, and Sasaki (1998), which analyzed an optimal currency basket system by taking into account trade of ASEAN countries with Japan and the United States, into a theoretical model that considers intra-regional trade in the ASEAN. Characteristics of the theoretical model include one that we introduced the intra-regional trade in the ASEAN to explain explicitly policy reaction functions of two countries in the ASEAN. In the theoretical model, we supposed that the monetary authorities of two countries in the ASEAN had a policy objective of stabilizing fluctuations in trade balances for their exchange rate policy. They adjust weights on the US dollar and the Japanese yen in a currency basket for the objective. Its analytical result shows a possibility that one country cannot adopt an optimal currency basket system but a dollar peg system when the other country adopts the dollar peg system. It implies that all of the countries might be faced with "coordination failure" in choosing their exchange rate system.
We used data on ASEAN 5 countries, China, and Korea to conduct an empirical analysis on the possibility of "coordination failure" in exchange rate policy. We empirically analyzed the possibility of "coordination failure" by comparing the monetary authorities' losses in a case of adopting an optimal exchange rate system with those in a case of adopting the dollar peg system, given that the neighboring countries adopt the dollar peg system. We obtained some possibilities of "coordination failure" in exchange rate policy. It suggest a policy implication that international coordination in exchange rate policy is important in order to depart from the coordination failure.
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