Research Paper 46, July 2012

Asian Initiatives at Monetary and Financial Integration: A Critical Review.

Whilst the first steps towards Asian trade cooperation stated in 1970s, it was the Asian Financial Crisis of 1997 that triggered Asian efforts at monetary and financial integration. This paper argues that the conditions for Asian monetary integration are not conducive but that efforts at monetary cooperation should proceed at three fronts – exchange rate cooperation, coordination of capital flows control, and strengthening of regional financial liquidity management as in the Chiang Mai Initiative and regional surveillance.

In the area of financial integration, the authors critically review the reasons and performance of regional local currency bond markets. While the advantages of local currency bond markets are well known, the authors highlight the risks and downside, namely foreign exchange volatility, macro-economic instability, non-inclusive financing, and pro-cyclicality. The authors propose attention should be given to other institutional financing structures namely more regional and national long-term credit/development banks that can reduce instability associated with capital markets while addressing the problems of currency and maturity mismatch as well as pro-cyclicality and non-inclusive financing.

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