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«Do Currency Regimes Matter in the 21st Century? An Overview Hiroshi Fujiki and Akira Otani This paper selectively reviews the recent literature on ...»

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Ghosh, Atish R., Anne-Marie Gulde, Jonathan D. Ostry, and Holger C. Wolf, “Does the Nominal Exchange Rate Regime Matter?” NBER Working Paper No. 5874, National Bureau of Economic Research, 1997.

Glick, Reuven, “Fixed versus Flexible Exchange Rates: Is It Still Possible to Manage in the Middle?” in Gordon de Brouwe, ed. Financial Markets and Policies in East Asia, Routledge Press, 2001, pp. 220–234.

———, “Comment on ‘Do Currency Regimes Matter in the 21st Century? An Overview,’” Monetary and Economic Studies, 20 (S-1), Institute for Monetary and Economic Studies, Bank of Japan, 2002, pp. 82–88 (this issue).

———, and Andrew K. Rose, “Does a Currency Union Affect Trade? The Time Series Evidence,” NBER Working Paper No. 8396, National Bureau of Economic Research, 2001.

Hämäläinen, Sirrka, “The ECB’s Monetary Policy—Accountability, Transparency, and Communication,” speech given at the Conference on Old Age, New Economy and Central Banking in Helsinki, Finland, September 14, 2001.

Hausmann, Ricardo, “Argentina’s Route to Salvation,” Financial Times, January 4, 2002.

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Meltzer, Chairman, 2000, Washington, D.C. (Meltzer Commission [2000]).

Kaminsky, Graciela L., and Carmen M. Reinhart, “On Crises, Contagion, and Confusion,” Journal of International Economics, 51, 2000, pp. 145–168.

———, and ———, “Financial Markets in Times of Stress,” mimeo, 2001.

Kawai, Masahiro, and Shigeru Akiyama, “Implications of the Currency Crisis for Exchange Rate Arrangements in Emerging East Asia,” World Bank Working Paper No. 2502, World Bank, 2000.

Keynes, John Maynard, A Tract on Monetary Reform, Macmillan and Co., 1923.

Kletzer, Kenneth M., and Jürgen von Hagen, “Monetary Union and Fiscal Federalism,” ZEI Working Paper B01-2000, Center for European Integration Studies, 2000.

Knetter, Michael, “International Comparisons of Pricing-to-Market Behavior,” American Economic Review, 83, 1993, pp. 473–786.

Kollmann, Robert, “The Exchange Rate in a Dynamic-Optimizing Business Cycle Model with Nominal Rigidities: A Quantitative Investigation,” Journal of International Economics, 55 (2), 2001, pp. 243–262.

Krugman, Paul, “A Model of Balance-of-Payment Crisis,” Journal of Money, Credit and Banking, 11 (3), 1979, pp. 311–325.

———, “The Myth of Asia’s Miracle,” Foreign Affairs, November/December, 1994, pp. 62–93.

———, “What Happened to Asia?” unpublished manuscript, 1998.

———, “Crisis: The Price of Globalization?” in Global Economic Integration: Opportunities and Challenges, a symposium sponsored by the Federal Reserve Bank of Kansas City, 2000, pp. 75–106.

———, “Crisis: The Next Generations?” paper prepared for a conference at Tel Aviv University on March 25–26, 2001.

Kuroda, Haruhiko, “The Future International Financial Architecture and Regional Capital Market Development,” speech given at the Round-Table on Capital Market Reform in Asia in Tokyo on April 11, 2000 (http://www.mof.go.jp/english/if/if015/htm).

Lane, Philip, “The New Open Economy Macroeconomics: A Survey,” Journal of International Economics, 54 (2), 2001, pp. 235–266.

77 Levy-Yeyati, Eduardo, and Federico Sturzenegger, “Classifying Exchange Rate Regimes: Deeds vs.

Words,” mimeo, 2000.

———, and ———, “To Float or to Trail: Evidence on the Impact of Exchange Rate Regimes,” mimeo, 2001.

Marston, Richard C., “Pricing to Market in Japanese Manufacturing,” Journal of International Economics, 29, 1990, pp. 217–236.

Masson, Paul R., “Exchange Rate Regime Transition,” Journal of Development Economics, 64, 2001, pp. 571–586.

McKinnon, Ronald I., “Optimum Currency Areas,” American Economic Review, 53 (4), 1963, pp. 717–725.

———, “After the Crisis, the East Asian Dollar Standard Resurrected: An Interpretation of HighFrequency Exchange-Rate Pegging,” in Joseph Stiglitz and Shahid Yusuf, eds. Rethinking the East Asian Miracle, World Bank and Oxford University Press, 2001.

Meltzer, Allan H., “On Making Monetary Policy More Effective Domestically and Internationally,” Monetary and Economic Studies, 14 (1), Institute for Monetary and Economic Studies, Bank of Japan, 1996, pp. 1–27.

Mishkin, Frederic S., “Financial Policies and the Prevention of Financial Crisis in Emerging Market Countries,” NBER Working Paper No. 8087, National Bureau of Economic Research, 2001.

———, and Miguel A. Savastano, “Monetary Policy Strategies for Latin America,” Journal of Development Economics, 66, 2001, pp. 415–444.

Morris, Stephen, and Hyun Song Shin, “Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks,” American Economic Review, 88 (3), 1998, pp. 587–597.

Mundell, Robert A., “A Theory of Optimum Currency Areas,” American Economic Review, 51 (4), 1961, pp. 509–517.

———, “Interview with Mundell: Thinking about International Economy,” Diamond Harvard Business, December–January, 2000, pp. 11–19 (in Japanese).

Noyer, Christian, “The International Impact of Euro,” speech on the occasion of a visit to the United States, 2000 (http://www.ecb.int/key/00/sp000113.htm).

———, “‘Challenges Ahead’: The Accession Process,” speech given at the Foreign and Commonwealth Office, London, November 12, 2001.

Nurkse, Ragnar, “Exchange Fluctuations,” in International Currency Experience: Lessons of the Inter-War Period, League of Nations, Princeton University Press, 1944, pp. 113–142.

Obstfeld, Maurice, “The Logic of Currency Crises,” Cahiers Economiques et Monétaires, 43, Banque de France, 1994, pp. 189–213.

———, “EMU: Ready, or Not?” Princeton Essays in International Finance, No. 209, International Finance Section, Department of Economics, Princeton University, 1998.

———, and Kenneth Rogoff, “Exchange Rate Dynamics Redux,” Journal of Political Economy, 103, 1995, pp. 624–660.

———, and ———, “Risk and Exchange Rates,” NBER Working Paper No. 6694, National Bureau of Economic Research, 1998.

———, and ———, “New Directions for Stochastic Open Economy Models,” Journal of International Economics, 50, 2000, pp. 117–153.

———, and ———, “Global Implications of Self-Oriented National Monetary Rules,” mimeo, 2001.

Ogawa, Eiji, “The US Dollar in the International Monetary System after the Asian Crisis,” mimeo, 2001.

———, and Takatoshi Ito, “On the Desirability of a Regional Basket Currency Arrangement,” NBER Working Paper No. 8002, National Bureau of Economic Research, 2000.

Otani, Akira, “Pricing-to-Market (PTM) and the International Monetary Policy Transmission: The ‘New Open-Economy Macroeconomics’ Approach,” Monetary and Economic Studies, 20 (3), Institute for Monetary and Economic Studies, Bank of Japan, 2002, pp. 1–34.

Padoa-Schioppa, Tommaso, “EMU and Banking Supervision,” lecture given at the London School of Economics, 1999.

78 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/DECEMBER 2002 Do Currency Regimes Matter in the 21st Century? An Overview Parti, Alessandro, and Garry J. Schinasi, “Financial Stability in European Economic and Monetary Union,” IMF Working Paper, International Monetary Fund, 1999.

Reinhart, Carmen M., and Todd R. Smith, “Temporary Controls on Capital Inflows,” NBER Working Paper No. 8422, National Bureau of Economic Research, 2001.

Rodrik, Dani, “Who Needs Capital-Account Convertibility?” Princeton Essays in International Finance, No. 207, International Finance Section, Department of Economics, Princeton University, 1998.

Rogoff, Kenneth, “On Why Not a Global Currency?” American Economic Review, 91 (2), 2001, pp. 243–247.

Rose, Andrew K., “One Money, One Market: Estimating the Effect of Common Currencies on Trade,” Economic Policy, 30, 2000, pp. 7–45.

———, and Eric Van Wincoop, “National Money as a Barrier to International Trade: The Real Case for Currency Union,” American Economic Review, 91 (2), 2001, pp. 386–390.

Sachs, Jeffrey, “Duhalde’s Wrong Turn,” Financial Times, January 10, 2002.

Salvatore, Dominick, “Which Countries in the Americas Should Dollarize?” Journal of Policy Modeling, 23, 2001, pp. 347–355.

Schneider, Martin, and Aaron Tornell, “Balance Sheet Effects, Bailout Guarantees and Financial Crisis,” NBER Working Paper No. 8060, National Bureau of Economic Research, 2000.

Shambaugh, Jay C., “The Effects of Fixed Exchange Rates on Monetary Policy,” University of California, Berkeley, Job Market Paper, 2001.

Shioji, Etsuro, “Welfare Implications of the 1995–1998 Yen Depreciation on Asia,” paper prepared for the EMEAP Deputies’ Meeting held in March 2001.

Study Group for the Promotion of the Internationalization of the Yen, Report, June 27, 2001 (http://www.mof.go.jp/english/if/if043a.htm).

Summers, Lawrence, “International Financial Crises: Causes, Prevention and Cures,” American Economic Review, Papers and Proceedings, 90, 2000, p. 1–16.

Taylor, John B., Macroeconomic Policy in a World Economy, New York: Norton, 1993.

von Hagen, Jürgen, “Fiscal Arrangements in a Monetary Union—Some Evidence from the US,” in Don Fair and Christian de Boissieux, eds. Fiscal Policy, Taxes, and the Financial System in an Increasingly Integrated Europe, Kluwer Academic Publishers, 1992.

———, Andrew Hughes Hallett, and Rolf Strauch, “Budgetary Consolidation in Europe: Quality, Economic Conditions and Persistence,” paper presented at the 14th Annual NBER-CEPRTCER Conference, 2001.

———, and Jizhong Zhou, “The Choice of Exchange Rate Regimes: An Empirical Analysis for Transition Economies,” ZEI Working Paper B03-2002, Center for European Integration Studies, 2002a.

———, and ———, “De Facto and Official Exchange Rate Regimes in Transition Economies,” ZEI Working Paper B13-2002, Center for European Integration Studies, 2002b.

———, and ———, “The Determination of Capital Controls in Transition Economies: Which Role Do Exchange Rate Regimes Play?” mimeo, 2002c.

Williamson, John, Exchange Rate Regimes for Emerging Markets: Reviving the Intermediate Option, Institute for International Economics, 2000.

World Bank, The East Asian Miracle, Oxford University Press, 1993.

Wyplosz, Charles, “Exchange Rate Regimes: Some Lessons from Post-War Europe,” CEPR Working Paper No. 2773, Centre for Economic Policy Research, 2001a.

———, “A Monetary Union in Asia? Some European Lessons,” paper presented at the conference organized by the Reserve Bank of Australia on July 24, 2001b.

Young, Alwyn, “The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience.” Quarterly Journal of Economics, 110, 1995, pp. 641–680.

———, “Gold into Base Metals: Productivity Growth in the People’s Republic of China during the Reform Period,” NBER Working Paper No. 7856, National Bureau of Economic Research, 2000.

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I am delighted to have this opportunity to comment on the paper by Hiroshi Fujiki and Akira Otani. It is always a difficult task to write an overview paper, particularly so on a broad and highly controversial topic such as the choice of exchange rate regime. However, it is a task the authors handle very well. They cover a wide range of topics—from what lesson we can draw from the process of European monetary unification, the issues that arise in the context of the widely expected enlargement of the European Monetary Union (EMU), the costs and benefits of dollarization, to the prospects for currency unification in Asia and in the Americas, and so on—and do so in a balanced way. Overall, there is little I take issue with.

As with any broad and careful paper, this is not one that it is easy to comment on.

However, the authors would like to draw our attention to an underlying issue concerning the choice of theoretical framework in which to analyze the choice of exchange rate regime. While historically that analysis has been conducted within the framework of the Mundell-Fleming model, the paper suggests that this is not a good starting point. Rather, as they make clear in their appendix, their preference is to start from the recent literature on the “new open-economy macroeconomics,” which was initiated by Obstfeld and Rogoff (1995) and which is nicely summarized by Lane (2001). In my discussion, I will therefore focus on what that literature has to say about the central issue policymakers face, that is, whether and under what circumstances they should adopt a fixed or a floating exchange rate regime.

Before doing so, it is useful to briefly outline the most important features of the new literature. Its defining characteristic is the incorporation of Keynesian features in a dynamic general equilibrium model of the open economy. Two aspects of the models are particularly important. First, there is imperfect competition in goods markets and prices are sticky. This implies that there is a serious price-setting decision to be modeled. Moreover, with prices above marginal costs, firms would like to expand production at the current level of prices. Thus, output is in this sense demand determined. Finally, activity is below the level that would arise if goods markets were competitive. This implies that monetary policy could potentially raise welfare by expanding output. Second, firms maximize profits and consumers maximize utility. That is important because it provides a natural metric, the level of utility, which can be used to compare and rank exchange rate regimes.

It deserves to be noted that, as is the case with all economic theory, the conclusions we draw depend on the assumptions made. One particularly important assumption concerns the nature of the price-setting process. In contrast to utility functions that

57. I am grateful to Mick Devereux for useful discussion regarding the literature on the new open-economy macroeconomics. The views expressed here are solely my own and not necessarily those of the HKMA and the HKIMR.

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