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Chiang Mai Initiative

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1 Chiang Mai Initiative on Sun Aug 15, 2010 7:07 am


Chiang Mai Initiative
The CMI is a landmark liquidity support facility in East Asia, which is intended to reduce
the risk of currency crises and manage such crises or crisis contagion. It comprises (i) a
network of bilateral swap agreements (BSAs) among PRC, Japan, and Korea, and
between one of these Plus-3 countries and a select ASEAN member and (ii) the ASEAN
Swap Arrangement (ASA). The total amount under the bilateral swap agreements reached
US$90 billion—with 16 BSAs—and the total ASA stood at US$2 billion as of April 2009

Exchange rate policy coordination
Currently no consensus exists, even within ASEAN or ASEAN+3, on a regional
exchange rate arrangement, despite the rising economic and financial interdependence
within East Asia (Moon and Rhee, 2009). But, looking beyond the current global financial
crisis and economic difficulties and considering the rising degree of economic
interdependence among East Asian economies through trade and investment, these
economies need to undertake greater exchange rate policy coordination with each other.
Once global financial stability is restored and these economies register early recovery
and move to monetary policy exit, one can expect the resumption of large capital inflows
into Asia. To manage such capital inflows and maintain macroeconomic and financial
sector stability, it will be important for these economies to allow greater rate flexibility visà-
vis outside currencies—such as the US dollar and the euro—but this may damage a
country’s international price competitiveness when its neighbors resist currency
appreciation. Hence, the best policy option for the region is to allow collective currency
appreciation vis-à-vis the US dollar and the euro, while keeping relative stability of
intraregional rates, which does not significantly damage each country’s international
price competitiveness and spreads adjustment costs across countries (Kawai 2008).
Such collective exchange rate appreciation of the East Asian currencies will require a
significantly coordinated approach to exchange rate regimes.
To prepare for this type of policy coordination, emerging East Asian economies may
consider adopting policies to stabilize their exchange rates against a common basket of
external and internal currencies—called the SDR-plus, comprising the US dollar, the
euro, the pound sterling, the Japanese yen, and emerging Asian currencies—in order to
achieve relative stability of their effective exchange rates and intra-regional exchange
rates. An appropriately weighted basket of the yen and emerging Asian currencies can
be defined as an Asian Currency Unit (ACU); it is a currency basket of ASEAN+3
currencies (and possibly including the Hong Kong dollar).15 An ACU index can measure
the degree of joint movement of East Asian currencies and the divergence of individual
component currencies from the regional average given by the ACU rate. Figure 2
illustrates the point that the won and yen were moving in divergent directions between
the pre- and post-global financial crisis periods. Once the PRC moves to adopt a more
flexible exchange rate regime, ACU movements and divergence indicators would
provide more meaningful information.
These efforts can help further strengthen Asian monetary cooperation. Collective
appreciation requires at least informal policy coordination—through more effective policy
dialogue and communication among ASEAN+3 authorities—in terms of their choice of
exchange rate regimes. Use of an ACU index will be useful in facilitating policy dialogue
and currency-market surveillance. This could be followed by more formal coordination of
exchange rate policy with clearly defined rules for exchange rate parities, which could be
defined in terms of an SDR-plus or even an ACU basket and exchange market

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