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Message from ADB's President Contributors Acknowledgements Executive Summary and Recommendations Jeffrey D. Sachs, Masahiro Kawai, Jong-Wha Lee, and Wing Thye Woo Paper Summaries (full papers downloadable) International Monetary Advisory Group Global Financial Crisis, its Impact on India and the Policy Response Nirupam Bajpai To What Extent Should Capital Flows be Regulated? Maria Socorro Gochoco-Bautista The Case for a Further Global Coordinated Fiscal Stimulus Willem Buiter Managing a Multiple Reserve Currency World Barry Eichengreen From the Chiang Mai Initiative to an Asian Monetary Fund Masahiro Kawai An Asian Currency Unit for Asian Monetary Integration Masahiro Kawai The International Monetary System at a Crossroad Felipe Larrain B. Towards a New Global Reserve System Joseph Stiglitz A Realistic Vision of Asian Economic Integration Wing Thye Woo An Asian Monetary Unit? Charles Wyplosz Will US fiscal Deficits Undermine the Role of the Dollar as Global Reserve Currency? If So, Should US Fiscal Policy be geared to Preserving the International Role of the Dollar? Yongding Yu International Monetary Working Group International Reserves and Swap Lines: the Recent Experience Joshua Aizenman, Donghyun Park and Yothin Jinjarak The Future of the Global Reserve System Daniel Gros, Cinzia Alcidi, Anton Brender, and Florence Pisani Renminbi Policy and the Global Currency System Yiping Huang Will the Renminbi Emerge as an International Reserve Currency? Jong-Wha Lee Asia's Sovereign Wealth Funds and Reform of the Global Reserve System Donghyun Park and Andrew Rozanov Reforming International Monetary System Kanhaiya Singh Designing a Regional Surveillance Mechanism for East Asia: Lessons from IMF Surveillance Shinji Takagi

10. An Asian Monetary Unit?

Charles Wyplosz

Formally, the proposed Asian Monetary Unit (AMU) is a basket composed of the currencies of the 13 countries that form the ASEAN+3 grouping. Its usefulness has been examined by various study groups set up by Finance Ministers, with no formal conclusion so far. A basket of currencies is of no particular interest unless it is being used for particular purposes.

Proposals for the AMU follow the example of the European Currency Unit (ECU). ECU served as a unit of account, as a basis for computing exchange rate divergence indicators and was briefly used by private markets to issue debt instruments. Obviously, the proponents of the AMU aim as using it to foster exchange cooperation and possibly to create a regional bond market.

In Europe, the ECU never played any role but could an AMU meet a more brilliant fate? The ECU was superseded by the elaborate Exchange Rate Mechanism, which imposed many obligations on member countries. The East Asian countries have shown that they are not ready to accept the same restrictions on their monetary policies, but at the same time they are concerned that exchange rate movements affect their external competitiveness. In addition, they are open to currency mismatches, mostly in US dollars, which were at the root of the 1997-98 crisis.

The AMU proposal represents one more attempt at squaring the circle of greater exchange rate cohesion without giving up total control of monetary policies. The Chiang Mai Initiative has evolved towards an ERPD (Economic Review and Policy Dialogue) which covers exchange rate arrangement. It also dovetails with the Asian Bond Market Initiative. Yet, exchange rate policy coordination has remained elusive and progress on bond market integration at the regional level remains modest. Adopting the AMU is unlikely to change the situation.

A key reason is that, in and by itself, the AMU – with its associated divergence indicator – is not conducive to exchange rate arrangements because it requires choosing one regional currency (or a sub-regional basket) to act as anchor. The two regional giants, the People’s Republic of China and Japan, are the only ones whose could see their currencies play that role, but the floating yen and the tightly controlled RMB are not well suited for the task.

This is why basket peg proposals for the area are typically defined in terms of external currencies, in some cases including the yen as Japan is unlikely to join an exchange rate policy cooperation arrangement. Basket pegs directly address the intention of limiting intra-regional exchange rate fluctuations. In contrast, the AMU only suggests such an objective, the implicit idea being that interested countries could tie – to various degrees – their currencies to the Unit. This would require agreeing on the list of currencies to be included in the basket and on their corresponding weights. An alternative is to bypass these discussions altogether and let each country choose its own basket. If the weights are based on trade volumes, the difference between common and own-baskets is trivial.