On the Feasibility of a Regional Exchange Rate System for East Asia : Lessons of the 1992/93 Erm Crisis

In contrast to the popular bipolar view on exchange rate choices, this paper argues that intermediate regimes in general and regional exchange rate systems such as the European Monetary System (EMS) in particular should not be ruled out per se when discussing monetary options for East Asian countries. The paper recalls that the 1992/93 crisis of the EMS' Exchange Rate Mechanism had been the crisis of an exchange rate system and not just the collapse of unilateral pegs pursued by individual countries. The paper discusses distinct features that add to the credibility of regional exchange rate systems and reasons that a system that is built around well-defined rules and which is being managed very carefully and cooperatively according to those rules could be both credible and sustainable even in the 21st century. The East Asian countries, however, do not fulfill these requirements at this point in time. The paper hence recommends a gradual approach to monetary integration in East Asia, including a coordinated move toward currency baskets, the composition of which could be harmonized over time