Near-Term Exchange Rate Flexibility in East Asia: Precursor to Regional Monetary Union?

January 2008

Abstract

Trade integration has advanced far in East Asia whereas financial integration has been lagging. Important policy initiatives have, however, been taken. This process will eventually require further relaxation of cross-border capital controls, which in turn will make exchange rate stabilisation schemes more difficult to operate. These developments seem to run counter to the perceived need to promote intra-regional exchange rate stability in order to maintain trade integration. However, it would be risky to impose regional exchange rate stabilisation schemes over an indefinite period. Monetary union could still be a worthy objective, but near-term exchange rate stabilisation should not be part of the road map.