Given the increaing importance of capital market development for financial stability and mulitlateral cooperation for sustained growth, a country’s choice of exchange rate regime is hardly trivial. Instead of relying on a series of individually managed floats, it would be better for each country to target its currency against a basket of other currencies. A still much better alternative would be to form a regional block, which would tie Asian currencies together and create a regional currency while allowing them to float against major currencies. Whether the type is an individual peg to a tailored basket or a multilateral peg to a common basket remains to be determined. Under any plausible scenario, some type of regional currency needs to be developed to promote an environment suitable for financial and monetary cooperation that is, in turn, conducive to capital market development. Since conditions in th region are increasingly favorable for an OCA (Optimal Currency Area), such cooperation would be mutually beneficial as well as globally desirable.
A Roadmap for the Asian Exchange Rate Mechanism
KIEP Working Paper 05-04