MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/DECEMBER 2002

Introduction
Kunio Okina, Hiroshi Fujiki,and Akira Otani

The 10th International Conference of the Institute for Monetary and Economic
Studies (IMES) of the Bank of Japan was held on July 1 and 2, 2002, on the themeof “Exchange Rate Regimes in the 21st Century.” (See Appendix 1 for a list of theround-table participants.)
The currency regime has undergone major changes with the launch of circulationof euro banknotes and coinage in 2002 and an increased move toward dollarizationin the Americas. The frequent currency crises occurring in the emerging market
economies since the latter half of the 1990s have fueled an extensive debate
among central banks, international organizations, and academic economists on theprevention of crises and the role of international organizations. The purpose of
the conference was to discuss future currency regimes and the role of central banks,
taking account of these changes in the currency regime and the subsequent debates
on related subjects.
The conference focused on three regions—the Americas, Europe, and East Asia—and involved theoretical, empirical, and policy-oriented discussions of (1) the
short- to medium-term possibilities for the development of currency areas in each of
the three regions; (2) systems for achieving both exchange rate stability and domestic
price stability among the three major currencies (the dollar, euro, and yen); and(3) the role to be played by central banks.
Having defined its theme, the conference began with an opening speech by
Governor Masaru Hayami of the Bank of Japan, followed by keynote speeches
by the two honorary advisors of IMES. The first session offered an overview of theissues to be discussed at the conference. The following sessions were devoted topapers concerning more specific issues. The conference closed with a panel discussion
on price and exchange rate stability. (See Appendix 2 for the program.)
In Session 1, entitled “Do Currency Regimes Matter in the 21st Century? An
Overview,” the paper that was presented began with definitions of exchange rate
regimes and a survey of their development. This was followed by an examinationof the “bipolar view” that gained popularity in the second half of the 1990s.1 The
validity of the bipolar view was examined for the Americas, Europe, and East Asia,
1. The bipolar view is that the choice of an appropriate exchange rate regime, for economies with access to international capital markets, means a move away from the middle ground of pegged but adjustable fixed exchange
rates toward the two corner regimes of either flexible exchange rates or a fixed exchange rate, supported by acommitment to give up altogether an independent monetary policy. Representative papers include Stanley Fischer,“Exchange Rate Regimes: Is the Bipolar View Correct?” Journal of Economic Perspectives, 15 (2), 2001,
pp. 3–24, and Lawrence Summers, “International Financial Crises: Causes, Prevention and Cures,” American
Economic Review, Papers and Proceedings, 90, 2000, pp. 1–16.

1followed by a review of the possibility of the establishment of regional currency areas
in each of these regions.
In Session 2, entitled “Exchange Rate Regimes in the Americas: Is Dollarization
the Solution?” the paper that was presented reviewed the current choice of exchange
rate regimes in the Americas and presented a theoretical review of the background ofthese choices. Next, it mentioned countries gaining significant immediate advantages
from dollarization and countries expected to maintain floating exchange rate regimes.
Last, it touched upon the outlook for a regional currency area in the Americas.
In Session 3, entitled “Monetary and Fiscal Policy in the European Monetary
Union,” the paper that was presented examined monetary and fiscal policies following the establishment of the European Monetary Union (EMU). It was asserted that,while the management of monetary policy has thus far progressed smoothly, room
for improvement remains in fiscal discipline under the Maastricht Treaty and theStability and Growth Pact.
In Session 4, entitled “Exchange Rate Arrangements in East Asia: Lessons fromthe 1997–98 Currency Crisis,” the paper that was presented asserted that, in view ofthe broad range of fluctuation in the yen-dollar exchange rate and the broad diversity
in the region’s trade and direct-investment partners, the economies of the region
should stabilize their exchange rates by adopting currency baskets in which theyen, dollar, and euro are assigned equal weights. Furthermore, it was argued that, tostabilize the region’s exchange rates, it was desirable to coordinate adoption of aregional currency-basket system, and that such coordination should be supplemented
by improvements in the region’s mutual surveillance and financing facilities.
In Session 5, entitled “Independent Currency Unions, Growth, and Inflation,”the paper that was presented examined the effect of currency unions on macroeconomic performance. Using data from the period of 1970–98, the macroeconomic
performances of the members of independent currency unions that issued a common
currency and pegged their currency to that of an advanced country were compared tothe performance of countries that maintained their own domestic currencies.
The concluding session featured a panel discussion of the theoretical and practicalissues concerning price stability and exchange rate stability. Panelists consisted of thechairperson and three other central bankers, and the two honorary advisors of IMES.
The panel discussion was concluded with comments by the chairperson.
The discussions of the conference covered a very broad spectrum of issues. Belowis our summary of the main points.
(1) The evaluation of exchange rate regimes should be undertaken after giving
due attention to the fiscal and structural policies, degree of international
capital movements, and historical and political background of the country inquestion. For instance, a fixed exchange rate system does not in itself automatically generate the fiscal discipline needed to maintain parity, and thus
it requires broad institutional support. Likewise, the achievement of pricestability under a floating exchange rate system requires effective measures toincrease the level of transparency in monetary policy.
(2) Regarding the choice of exchange rate regimes, hard pegs are viable options
for small and highly open economies. On the other hand, for the following

2 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/DECEMBER 2002

Introduction

reasons, floating rates are more desirable for countries that have alreadyachieved price stability. Under conditions of active capital flow, the maintenance of hard pegs requires rigorous fiscal discipline that presents a very highpolitical hurdle. Historically, it has been shown that it is difficult to find theright timing for exiting a peg.
(3) The “bipolar view” that gained popularity in the second half of the 1990s as astandard for choosing appropriate exchange rate regimes is conceptually clear.
However, it is actually very difficult to maintain a hard peg, while various formsof floating-rate systems have been adopted in various regions based on the
degree of capital controls. Thus, in reality, it is quite possible that the “size” ofthe two poles differs. Because of this asymmetry, the selection of exchange rate
regimes cannot be presented as a simple choice between two polar options.
(4) Regarding the choice of exchange rate regimes in the Americas, among
countries with the opportunity to participate in international capital markets,a clear bipolarity is emerging in the choice of floating rates and hard pegs.
A consensus was reached on the following points. The larger countries of theAmericas that satisfy the following three conditions should adopt floatingexchange rate regimes and need not move toward dollarization: (1) diversity inthe range of trading partners; (2) downward rigidity of nominal prices; and(3) stable monetary policies. On the other hand, dollarization is a viableoption for countries with poor records of monetary policy credibility, andsmall countries whose current account and capital transactions are mostly
conducted with the United States.
(5) Regarding the monetary policy in the EMU, results and interpretations ofempirical studies concerning monetary policy by use of the Taylor rule andmoney-demand functions varied significantly because of the limited datathat were accumulated. Regarding fiscal policy, a consensus was reachedthat fiscal policies of individual countries must be disciplined to support
a common monetary policy. The opinion was voiced that fiscal policy
management should be subjected to further study from a political andeconomic perspective.
(6) Regarding exchange rate regimes in East Asia, in view of the broad range offluctuation in the yen-dollar exchange rate, the level of intra-regional concentration of trade, and the diversity of sources of foreign direct investment,
it was suggested that the region should adopt a currency-basket system basedon the yen, dollar, and euro. While some Asian participants expressed theirsupport for the adoption of currency-basket systems, others disputed thesuggestion on the following grounds: the use of the dollar in East Asia reflects
various important advantages of the dollar, such as the depth of financial
markets; and since the maintenance of a currency-basket system requires theresolution of a large number of practical problems pertaining to foreignexchange and monetary policies, floating rates are a more viable option overthe medium to long term.
(7) Regarding exchange rate regimes in Japan, the United States, and Europe,
it was agreed that it was generally desirable to maintain floating exchange

3rate regimes for the foreseeable future. With reference to Japan under the
special conditions generated by its liquidity trap, it was noted that the general
discussions did not adequately address the question of how Japan could use
exchange rates for domestic price stability. On this point, there was somediscussion of the efficacy of guiding the yen’s exchange rate downward
and of unsterilized intervention. Differences of opinion remained between
participants from the Bank of Japan who assumed a negative position andother participants who argued in favor of the possibilities of unsterilizedintervention and depreciating the yen.
(8) Regarding empirical studies of the effects of the choice of exchange rate
regimes on macroeconomic variables, it was agreed that it is difficult to
extract general principles from such studies due to the following restrictions.
(1) Because choices of exchange rate regimes are made simultaneously withchanges in macroeconomic variables, it is hard to establish clear causality.
(2) Exchange rate regimes do not undergo frequent changes. It was also noted
that, from the observed exchange rate data, it was difficult to distinguishbetween underlying trends and temporary fluctuations resulting from theimpact of market liquidity or the behavior of certain speculators.
(9) Regarding a framework for understanding the impact of foreign exchange
fluctuations on domestic prices, desirable exchange rate regimes, and theeconomic effects of international coordination of monetary policies, attention
was drawn to a new open-economy macroeconomics that would facilitate
understanding of the impact of foreign exchange fluctuations with explicit
consideration of market structure. However, it was pointed out that even suchnew theoretical approaches cannot adequately explain such essential questions
as why only certain countries are able to borrow from overseas sources in theirown domestic currencies.

4 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/DECEMBER 2002

Introduction

APPENDIX 1: LIST OF ROUND-TABLE PARTICIPANTS
Ismail Alowi
Director, Monetary and Financial
Policy Department, Central Bank of
Malaysia

Reuven GlickVice President and Director, Center for
Pacific Basin Studies, Federal Reserve
Bank of San Francisco

Jorge A. Braga de Macedo
President, OECD Development
CentreLinda S. Goldberg
Vice President, International Research
Function, Federal Reserve Bank of
New York

Chow Hwee Kwan
Lead Economist, Monetary Policy
Division, Monetary Authority ofSingapore
Vittorio Corbo
Professor of Economics, Pontificia
Universidad Católica de Chile
Roger W. Ferguson, Jr.
Vice Chairman, Board of Governorsof the Federal Reserve System
Pierre-Michel Fremann
Head of International Monetary
Relations Division-SERMI,
Banque de France
Hiroshi FujikiManager and Senior Economist,
Research Division I, Institute for
Monetary and Economic Studies,and Money and Capital Markets
Division, Financial Markets
Department, Bank of Japan
Gabriele GalatiHead, Monetary Policy and Exchange
Rates, Monetary and Economic
Department, Bank for International
Settlements
Stefan Gerlach
Executive Director, Research
Department, Hong Kong Monetary
Authority, and Director, Hong Kong
Institute for Monetary Research

Ruth C. Gonzaga
Bank Officer III, Department of
Economic Research, Bangko
Sentral ng Pilipinas
Jeong-Ho Hahm
Director General, Institute for
Monetary and Economic Research,
The Bank of Korea
Han Ming Zhi
Deputy Director General,
International Department,
The People’s Bank of China
Masaru Hayami
Governor, Bank of Japan
Werner Hermann
Director, International Monetary
Relations Section, Schweizerische
Nationalbank
Eiji Hirano
Executive Director, Bank of Japan
Thomas M. Hoenig
President, Federal Reserve Bank ofKansas City
William C. Hunter
Senior Vice President and Director of
Research, Federal Reserve Bank ofChicago5

Nigel H. Jenkinson
Deputy Director, Monetary Analysis,
Bank of England

Kunio Okina
Director, Institute for Monetary andEconomic Studies, Bank of Japan

Jerry L. Jordan
President and Chief Executive Officer,
Federal Reserve Bank of Cleveland

Akira Otani
Assistant Manager and Economist,
Research Division I, Institute for
Monetary and Economic Studies,Bank of Japan

Keimei Kaizuka
Professor, Faculty of Law,
Chuo University
Masahiro Kawai
Deputy Vice Minister forInternational Affairs,
Ministry of Finance, Japan
Malcolm D. Knight
Senior Deputy Governor,
Bank of Canada
Richard W. Kopcke
Vice President and Economist,
Economic Research Department,
Federal Reserve Bank of Boston
Hans Lindblad
Deputy Director, Monetary Policy
Department, Sveriges Riksbank
I. Igal Magendzo
Senior Economist,
Central Bank of Chile
Allan H. Meltzer
The Allan H. Meltzer University
Professor of Political Economy,
Graduate School of Industrial
Administration, Carnegie Mellon
University
Hiroshi Nakaso
Associate Director, Financial Markets
Department, Bank of Japan
Maurice Obstfeld
Class of 1958 Professor of Economics,
Department of Economics, Universityof California, Berkeley

Angel Palerm
Acting Deputy Director ofInternational Analysis,
Banco de México
Robert W. Rankin
Head of International Department,
Reserve Bank of Australia
Robert H. Rasche
Senior Vice President and Director of
Research, Federal Reserve Bank of
St. Louis
Michael Reddell
Head of Financial Markets
Department, Reserve Bank of
New Zealand
Roberto Rinaldi
Director, Head of the International
Division, Research Department,
Banca d’Italia
William T. Roberds
Vice President and Economist,
Research Department, Federal Reserve
Bank of Atlanta
Masaaki Shirakawa
Advisor to the Governor, Policy
Planning Office, Bank of Japan
Shigenori Shiratsuka
Manager and Senior Economist,
Research Division I, Institute for
Monetary and Economic Studies,Bank of Japan

6 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/DECEMBER 2002

Introduction

Amara Sriphayak
Director, Monetary Policy
Department, Bank of Thailand
Miyako Suda
Member of the Policy Board,
Bank of Japan
Wataru Takahashi
Associate Director, International
Department, Bank of Japan
Kazuo Ueda
Member of the Policy Board,
Bank of Japan
Pierre van der HaegenDirector General, Directorate-General
International and European Relations,
European Central Bank

Jürgen von Hagen
Professor of Economics and Director,
Center for European Integration
Studies, Rheinische FriedrichWilhelms-Universität Bonn
Perry Warjiyo
Deputy Director, Directorate of
Economic Research and Monetary
Policy, Bank Indonesia
Yutaka Yamaguchi
Deputy Governor, Bank of Japan
Tomoo Yoshida
Chief Manager, Research Division I,
Institute for Monetary and Economic
Studies, Bank of Japan7

8 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/DECEMBER 2002

APPENDIX 2: PROGRAM
Date/Time
Monday, 9:00–11:55
July 1

SessionOpening Speech
Keynote Speeches

Chairperson/Moderator

1 Do Currency Regimes Miyako Suda
Matter in the 21st
(Bank of Japan)
Century? An Overview

13:30–16:45 2 Exchange Rate
Regimes in theAmericas: Is
Dollarization the
Solution?
3 Monetary and Fiscal
Policy in the European
Monetary Union
9:00–12:15
4
Exchange Rate
Tuesday,
Arrangements in East
July 2
Asia: Lessons from the
1997–98 Currency
Crisis
5 Independent Currency
Unions, Growth, andInflation
13:30–17:00 Concluding Panel
Discussion: The Role ofCentral Banks in
Exchange Rate Regimes
in the 21st Century

Paper Presenter/Panelist
Masaru Hayami (Bank of Japan)
Allan H. Meltzer (Carnegie Mellon
University),
Maurice Obstfeld (University ofCalifornia, Berkeley)
Hiroshi Fujiki (Bank of Japan),
Akira Otani (Bank of Japan)

Designated DiscussantStefan Gerlach (Hong Kong Monetary
Authority/Hong Kong Institute for
Monetary Research),
Reuven Glick (Federal Reserve Bank of
San Francisco)
Linda S. Goldberg (Federal Reserve Bankof New York),
Angel Palerm (Banco de México)

Thomas M. Hoenig(Federal Reserve
Bank of Kansas City)

Vittorio Corbo (Pontificia Universidad
Católica de Chile)

Jorge A. Bragade Macedo(OECD)
Malcolm D. Knight(Bank of Canada)

Jürgen von Hagen (RheinischeFriedrich-Wilhelms-Universität Bonn)

Jerry L. Jordan(Federal Reserve
Bank of Cleveland)

I. Igal Magendzo (Central Bank of Chile) Gabriele Galati (Bank for International
Settlements),
Robert W. Rankin (Reserve Bank ofAustralia)
Introductory Remarks: Kunio Okina(Bank of Japan)
Panelists’ Remarks: Allan H. Meltzer,
Maurice Obstfeld,
Roger W. Ferguson, Jr. (Board ofGovernors of the Federal Reserve
System),Pierre van der Haegen (European
Central Bank),
Yutaka Yamaguchi (Bank of Japan)
Final Remarks: Kazuo Ueda

Kazuo Ueda
(Bank of Japan)

Masahiro Kawai (Ministry of Finance,
Japan)

Nigel H. Jenkinson (Bank of England),Stefan Schönberg (Deutsche Bundesbank,absent)Chow Hwee Kwan (Monetary Authorityof Singapore),
Eiji Hirano (Bank of Japan)