The Stability of Currency Systems in East Asia --Quantitative Analysis Using a Multi-Country Macro-Econometric Model--

The purpose of this paper is to examine the stability of East Asian financial and currency systems, using the multi-country macro-econometric model constructed by Kamada and Takagawa (2005) to depict economic interdependence in the Asian-Pacific region. The highly-developed system of the international production network in the East Asian region was not only the driving force behind the "East Asian miracle," but also, as seen in the "Asian currency crisis," worked as a platform whereby local economic crises immediately spread across countries. Economic interdependence in East Asia creates policy interdependence, whereby policy judgments in one country also affect the economies of other countries, and moreover, are fed back to the economy of the original country. After the currency crisis, several East Asian economies implemented reforms of their currency systems. In doing so, the chief concern of policymakers is thought to have been the problems of how to prevent a recurrence of the currency crisis and how to protect their own economies from currency crises occurring in other countries. Now that international safety nets such as the Chiang Mai Initiative are being cast over East Asia, the importance of currency crisis shocks is expected to become relatively small. Moreover, the economic situation in East Asia is changing, as observed in the rise of the Chinese economy and structural changes in the US and Japan. Therefore, systems designed on the basis of the current economic situation may not necessarily be maintained in their existing form. In this paper, the author carefully studies whether or not shifting from existing policy regimes to alternative policy regimes in nine East Asian countries or regions (Indonesia, Singapore, Thailand, the Philippines, Malaysia, South Korea, Hong Kong, Taiwan and China) is effective in increasing economic stability in their own countries against various economic shocks. As a result of the analysis, it is suggested that the existing currency system in East Asia is not necessarily stable and is likely to undergo further transformations in the future.