MercoPress. South Atlantic News Agency

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  Pei-Tha Gan

  It is impossible for Asian countries to appreciate the currency (as the one proposed by Khan). The reason is most of the Asian countries are small open economies. They cannot exert a substantial influence on their export prices, i.e. they are price taker; exceptionally, developed and oil exported countries are in the other way round. Thereby, an appreciation in the exchange rate will harm the domestic export in each Asian country, consequently, contributes a negative effect to the domestic aggregate demand channel.
  
  The current scenario faced by majority of the Asian countries is global recovery remains fragile. A similar recovery also in progress in most of the Asian countries after the subprime crisis 2007, some of these economies slow down because of weak world’s economics performance (e.g. slow down in world’s economic demand). In such a competitive situation, Asian countries will continue to under value their currency in order to boost their export. This action is persistence as the world’s economy continues weak.
  
  One significant point worth mentioning based on the event above is that such devaluation will not harm the domestic economy at least not for the short and the intermediate terms. The pillar behind this is domestic’s inflation contribution remaining low both from the supply side (e.g. imported inflation) and demand side. Therefore, devaluation should not be a threat to the domestic economy. Indeed, such an under value domestic currency associated with low domestic interest rates will facilitate achieving better economy growth. It means that Asian economies are using exchange rates as an additional operating target (i.e. exchange rates is manageable) to the interest rates to ensure the economy stability, though these countries do not officially declare it. In addition, a huge foreign exchange reserves accumulation in most of the Asian countries enables them to manage their exchange rates through sterilization, and thus leaves the interest rates unchanged and/or at a lower level. Furthermore, manageable exchange rate would avoid speculative activities and ensure stability in the foreign capital market.
  
  The example used by Khan is not appropriate for Asian economies, i.e. European’s case that appreciate the exchange rates. European is a big union, increase and decrease the EU dollar will not affect much on the economy within the regional countries. Thereby, Intra-trade in the regional countries is very possible as they used a same currency. Unlike the Asian countries, from the discussion in paragraphs above, it is not feasible to appreciate the currency to boost the economy or improve the speed of recovery process.
  
  In conclusion, it may not be wrong to under value the currency as more Asian economies had adopted de facto exchange rates prior to the crises (Asian crisis 1997/98 and subprime crisis 2007). In fact, a good monetary policy rule (i.e. normative analysis – monetary policy rule to determine what the central is).is needed to facilitate achieving the best outcomes of the economy. Thus, it is suggest that interest rates and exchange rates as operating targets (i.e. rules) would ensure the stability of the economy both in the domestic market and foreign capital market.
  
  (Readers are welcome to email me for requesting the references of this comment….gan.pt@fpe.upsi.edu.my)

  Nov 18th, 2009 - 02:45 am - Link - Report abuse 0
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