Regional Monetary Coordination in Asia after the Global Financial Crisis: Comparison in regional monetary stability between ASEAN+3 and ASEAN+3+3

In consideration of robust discussions on the possible creation of an East Asian Community encompassing ASEAN+6 (Japan, China, South Korea, India, Australia, and New Zealand), this discussion paper examines the stability of the intraregional exchange rates. In contrast to Ogawa and Yoshimi (2009) which focused on exchange rate stability within the framework of ASEAN+3 (Japan, China, and South Korea), this discussion paper empirically analyzes the stability of intraregional exchange rates under two different frameworks. The first framework is ASEAN+3+3, which includes the Indian rupee, the Australian dollar, and the New Zealand dollar in addition to the ASEAN+3 currencies, whereas the second includes just one additional currency, the Indian rupee, apart from the ASEAN+3 currencies.

In the analysis for this paper, I used AMU-wide Deviation Indicators (AMU-wide DI) published on the RIETI website, which measure the degree of fluctuations of each component currency of the AMU-wide regional currency basket. From around mid-2000, the weighted average of AMU-wide DI has consistently exceeded that of AMU DI, in which AMU-wide and AMU respectively correspond to ASEAN+3+3 and ASEAN+3. Meanwhile, a closer look at the weighted average of AMU-wide DI shows that the Australian dollar and the Indian rupee - along with the Japanese yen, the Chinese yuan, and the South Korean won - have made relatively large contributions to the weighted average.

Figure : AMU-wide Deviation Indicators

Source: RIETI's website

Findings from the analysis of β-convergence and σ-convergence show that component currencies within all of the three frameworks - i.e. ASEAN+3, ASEAN+3+3, and ASEAN+3 plus the Indian rupee - showed a strong tendency to deviate in between January 2005 and February 2010, a turbulent period that witnessed the boom of yen-carry trades, the surfacing of the sub-prime mortgage loan problem, and the collapse of Lehman Brothers. However, in the period between January 2001 and January 2005, during which the currency situation was relatively stable, the ASEAN+3 currencies showed a tendency to converge but no such tendency was observed for the other two frameworks of ASEAN+3+3 and ASEAN+3+India. Meanwhile, a comparison between ASEAN+3+3 and ASEAN+3+India in the period between September 2008 and January 2010 found that in the relative term, the tendency to converge was relatively larger for the latter than for the former.

These empirical findings have the following policy implications. First, in pursuing monetary coordination for intraregional exchange rate stability, it will be easier to start with the framework of the Chiang Mai Initiative (CMI), a network of bilateral currency swap arrangements already in place in East Asia, because intraregional exchange rates within ASEAN+3 countries, which are covered by the CMI, have shown greater stability than those under a broader framework that also includes the Indian rupee, the Australian dollar, and the New Zealand dollar. Second, in expanding the framework for monetary coordination as the next step, only the Indian rupee - rather than all the three remaining currencies - should be included because intraregional exchange rates within ASEAN+3+India have been relatively stable as compared to those within ASEAN+3+3. The presence of a currency swap arrangement between Japan and India, which is similar to those under the CMI, would also facilitate the inclusion of the Indian rupee as an additional currency for regional coordination.

• "Regional Monetary Coordination in Asia after the Global Financial Crisis: Comparison in regional monetary stability between ASEAN+3 and ASEAN+3+3"
  OGAWA Eiji (May, 2010)
  RIETI Discussion Paper, No.10-E-027
• "Analysis on β and σ Convergences of East Asian Currencies"
  OGAWA Eiji and YOSHIMI Taiyo (May, 2009)
  RIETI Discussion Paper, No.09-E-018