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Moving Towards Monetary Integration in East Asia: Achieving Economic Convergence in a Game-Theory Framework

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  • Juan Carlos Martinez Oliva

    (Bank of Italy, Rome, Via Nazionale 91-00184 Roma, Italy)

Abstract

This paper considers the current perspective of coordinating efforts to stabilize exchange rates in East Asia, viewed as the first and essential stage of monetary integration process. In this context, the effects of asymmetric demand and supply shocks affecting the two countries are considered, with the help of a game-theory model, and the outcomes from cooperative and non-cooperative fiscal policy responses are analyzed. The properties of fixed-exchange rate arrangements are analytically treated and numerically simulated in a situation where fiscal policies are left as the only device to deal with asymmetric shocks, both on the demand side and the supply side. The model prediction is that both asymmetric demand and supply shocks may be contrasted with the help of fiscal policies, without damaging consequences for the fixed-exchange rate arrangement. The model also suggests that the results will prove better when the fiscal response to the asymmetric shocks is coordinated. Not differently than what happened in Europe following the implementation of end stages of monetary integration, asymmetric fiscal policy response to asymmetric supply shocks may bring about the piling up of huge public debt, and pave the way to sovereign debt crises. Arguably, in such a situation joint fiscal responsibility may help reinforcing the process of integration and convergence.

Suggested Citation

  • Juan Carlos Martinez Oliva, 2014. "Moving Towards Monetary Integration in East Asia: Achieving Economic Convergence in a Game-Theory Framework," China Economic Policy Review (CEPR), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 1-24.
  • Handle: RePEc:wsi:ceprxx:v:03:y:2014:i:02:n:s1793969014500095
    DOI: 10.1142/S1793969014500095
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    References listed on IDEAS

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    More about this item

    Keywords

    Monetary integration; policy coordination; game theory; exchange rate regime; East Asia; E63; F31; F33; F42;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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