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In the present paper, we discuss three unintended consequences of European Integration; the division between the pro‐ and anti‐integrationists, doubts on the benefits of the free movements and the burden of the welfare state. Since 2017, Europe has regained confidence and optimism has returned due to sustained economic recovery and election victories of prointegration politicians, most notably in France. The European Union is embarking on co‐operation in defense and security, providing a new reason to support integration. Uncertainty over Brexit and immigration remain among the causes for grave concern. But Europe and Japan have taken a joint stance against protectionism, while Asia is yet to decide whether to do so as an integrated entity.

The paper considers the optimal transition path for China's exchange rate regime. How can China successfully make the shift from the current dollar peg regime to a more desirable regime, whether a basket peg or a floating regime? To answer this question, we develop a dynamic small open economy general equilibrium model. We construct four transition policies based on a basket peg or a floating regime and compare the welfare gains of these policies relative to maintaining the dollar peg regime. Two main results are derived from the quantitative analysis using Chinese data from 1999Q1 to 2010Q4. First, following a gradual adjustment to a basket peg regime is the most appropriate path for China to take, with minimal welfare losses associated with the shift in the exchange rate regime. Second, a sudden shift to the basket peg is the second best solution, and is superior to a sudden shift to floating because the monetary authority can efficiently determine optimal weights to attach to currencies in the basket to achieve policy goals once they adopt a basket peg regime. Eichengreen (2006), have pointed out the shortcomings of the de facto peg to the dollar and advocate the benefits of greater flexibility in the exchange rate under a floating regime to help the Chinese monetary authority tailor monetary conditions to domestic needs. In this context, the immediate removal of capital restrictions and gradual widening of the band of the exchange rate have been proposed.Others, such as Ito et al. (1998), Kawai (2004) and Yoshino et al. (2004a, b) propose a transition to a basket peg regime, which would overcome drawbacks of the dollar peg regime, with the economy currently negatively influenced by fluctuations in exogenous exchange rates: for instance, the dollar-yen rate. 1,2 For a country like China, which has close economic relationships with multiple partners, including the European Union, Japan and the USA, exchange rate stabilization using a basket comprising these currencies would be beneficial because it would remove the problem of large fluctuations in exchange rates. 3Contrary to the two lines of thought outlined above, McKinnon and Schnabl (2014) emphasize the importance of stabilizing the renminbi-US dollar exchange rate for the country's international competitiveness.Regardless of whether a basket peg or floating regime is considered to be appropriate in the long term, there remains a major question that has not been addressed in the literature on exchange rate regimes. How can China successfully transition to a desirable regime, whether a basket peg or a floating regime, from the current de facto peg to the dollar regime? Needless to say, a departure from the status quo would entail substantial costs for the monetary authority. Along the transition path toward a basket peg or a floating regime under perfect capital mobility, the monetary authority would have to remove capital controls and switch policy instruments (basket weight or money supply). To derive the optimal transition policy for China, we develop a ...

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Asian Development Bank InstituteThe Working Paper series is a continuation of the formerly named Discussion Paper series; the numbering of the papers continued without interruption or change. ADBI's working papers reflect initial ideas on a topic and are posted online for discussion. ADBI encourages readers to post their comments on the main page for each working paper (given in the citation below). Some working papers may develop into other forms of publication. The views expressed in this paper are the views of the authors and do not necessarily reflect the views or policies of ADBI, ADB, its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.Working papers are subject to formal revision and correction before they are finalized and considered published.Asian Development Bank Institute Kasumigaseki Building 8F 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, JapanTel:+81-3-3593-5500 Fax:+81-3-3593-5571 URL:www.adbi.org E-mail: info@adbi.org AbstractThis paper theoretically evaluates the dynamic effects of a shift in an exchange rate system from a fixed regime to a basket peg, or to a floating regime, and obtains transition paths for the shift based on a dynamic stochastic general equilibrium model of a small open economy. We apply quantitative analysis using data from the People's Republic of China and Thailand and find that a small open country would be better off shifting to a basket peg or to a floating regime than maintaining a dollar-peg regime with capital controls over the long run. Furthermore, due to the welfare losses associated with volatility in nominal interest rates, the longer the transition period, the larger the benefits of shifting suddenly to a basket-peg regime from a dollar-peg regime than proceeding gradually. Regarding sudden shifts to desired regimes, the welfare gains are higher under a shift to a basket peg if the exchange rate fluctuates significantly. Finally, shifting to a managed-floating regime is less attractive than moving to a basket peg, as the interventions necessary to maintain the exchange rate for certain periods result in higher losses and the authority lacks monetary policy autonomy. JEL Classification: F33, F41, F42ADBI Working Paper 517 Yoshino, Kaji, and Asonuma

This paper determines whether adopting the basket-peg rather than the floating regime is optimal for emerging market countries. Under the basket-peg regime, there is a trade-off between practical usefulness and welfare losses associated with capital movements across countries. We develop a dynamic stochastic general equilibrium model for small open economies to derive a simple basket weight rule. Although this is suboptimal, we find it practical and easy to implement. With calibration using Singaporean and Thai data for 1997Q3–2006Q2 and comparison among cumulative losses associated with the policy instrument rules, we show that a commitment to the basket weight rule is superior to other instrument rules under the floating regime for small, open emerging market countries like Singapore and Thailand.