Asian Monetary Union

Document Type:Coursework

Subject Area:Economics

Document 1

Although the establishment of the Asian Monetary Union can play an integral role towards improving the economy of its member states, it can also reveal certain shortcomings in the light of the optimum currency area theory and experience of the European Monetary Union. The Theory of the Optimum Currency Area The optimum currency area theory is the theory that suggests that certain nations that are not bounded by the national borders can significantly benefit from adopting a single currency (De Grauwe 2018). The optimum currency theory is primarily based on the geographical region that typically adopts a fixed exchange rate regime or a common currency with its borders. The primary benefit of the optimum currency area theory is that it has the potential of increasing the level of a trade in the region (Fingleton et al.

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However, it must outweigh the cost that a country incurs when it gave up its national currency as the instruments for adjusting the monetary policy to be effective. Based on the experience of the European Union, it was noted that there was mobility of labour between the member countries (Eichengreen 2014). The countries exchanged expertise in different fields without any restrictions. Ideally, it encourages the physical ability to travel, reduce cultural barriers to free goods and labour movements, and the institutional arrangments (Molle 2017). The free movement of labour between the member states allows them to have adequate labour supply at all periods without any hindrance. The openness with the wage, price and capital flexibility across the regions is another success factor of an economic integration.

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In many of the countries with a single currency, there is often a similar trend in their business cycles (Hefeker 2018). Without similar trends, it can prove hard for such countries to implement strategies that encourage free trade and movement of goods and labour. However, having a similar trend in the trade cycle can be associated with some limitations. For instance, when one of the countries experiences a recession or a boom, the other countries in the region are likely to experience the same. Such effects, however, allow the central banks to embark on strategies that promote growths. Other notable economic differences between the Asian countries include inflation rates, growth rate, unemployment rate and interest rates. These differences can create some hurdles to effective implementaion of the Asian Monetary Union and thus makes it unsuccessful towards meeting its objectives.

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Notably, countries with different economic requirements need to develop distinct fiscal and monetary policy to help them achieve their unique objectives. This means that it can prove difficult for the countries to come up with common fiscal policies that cater to the needs of all the member nations. Evidently, the dissimilarities in the economic structure, as well as the high degrees of specialization, can contribute to the increased vulnerability of the asymmetric shock within the region (Pollack 2015). The other risks of the Asian Monetary Union are that it can lead to the devaluation of the currency of the better-performing nations. This implies that some countries can gain from such economic integration while the other countries can lose especially those with a high economic growth rate.

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