The Impact of Monetary Regimes on International Trade: Are EU Experiences Relevant for Asia?
By Apanard P. Angkinand and Clas Wihlborg
The perceived success of regional integration in Europe has inspired debate in other parts of the world about potential economic benefits of different types of integration. In Asia in particular, monetary and financial integration has received attention. What are the benefits and how large are they? In this study we focus on trade effects of monetary integration and monetary policy regimes. The formation of the European Monetary Union (EMU) was associated with a monetary regime shift for most of the countries joining the currency union. Thus, trade creation effects of the currency union per se should be distinguished from trade volume effects of monetary regime shifts as well as from trade volume effects of the evolving internal market within the EU. From the point of view of Asian countries we ask whether substantial trade expansion can be achieved by the appropriate choice of monetary and exchange rate regimes without having to take on the political complications associated with a currency union and the legal and regulatory reforms associated with the internal market.
Several Asian countries have adopted inflation targeting as monetary regime along with flexible exchange rates. To analyze this choice, trade effects of real exchange rate changes are considered as well since a change in regime can have an impact on real exchange rate developments in the short term in particlar.
We argue that the commonly observed trade creating effect of the formation of the EMU on January 1, 1999 may not be a pure single currency effect but it may be caused by reduced macroeconomic uncertainty in many EMU countries as a result of changes in monetary policy institutions, procedures and targets. Several countries that later became members of the EMU had pre-EMU central banks with little credibility in terms of a monetary policy targets, and the targets shifted strongly towards low inflation during the transition to the EMU. Prior to the EMU few current EMU-members had a politically independent central bank persuing an inflation target. Germany stood out as the country with high credibility of a low inflation policy.
To the extent EMU effects are the result of changes in policy-making institutions, procedures and targets, the lesson from EMU might be that institutions and targets should be changed and the currency union itself could be relatively unimportant.
In the following section 2 we describe research design inn comparison with existing literature. Section 3 discusses the data and empirical methodology on EU-, EMU- and monetary regime effects on bilateral exports. The empirical results with respect to trade effects of the EMU, the EU and monetary regimes are reported in Section 4. In Section 5 trade effects in percent of membership in the EU, the EMU and monetary regime groups are calculated taking into account that membership in these groups are overlapping. Thereafter, we turn in Section 6 to experiences with inflation targeting, in particular, in Asia. We show how trade has developed for four countries that have adopted inflation targeting and interpret these developments in light of the results of the empirical analysis. Finally, lessons for Asia are discussed in the concluding Section 7.
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