This paper examines the costs of a unilateral exchange market intervention in a developing East Asian country, focusing on Korea, and stresses the need for exchange rate and monetary coordination in East Asia. Indeed, the case of Korea shows that individual countries in East Asia cannot manage their exchange rates, and that even if they try to do, the exchange market intervention operation results in heavy losses, achieving no expected results. Overcoming this dilemma requires a collective action through which all Asian countries simultaneously fluctuate their exchange rates vis-à-vis the US dollar to maintain intra-regional exchange rate stability. However, the precondition for such a collective action is not yet satisfactory. Active policy dialog to coordinate economic and monetary policies and to achieve greater economic convergence will be needed. (The rest is omitted.)

Executive Summary

I. Introduction

II. Increasing Financial Globalization and Regionalization

III. Intervention Cost: the case of Korea
1. Increasing Interest Arbitrage
2. Intervention and Sterilization Cost

IV. Proposal for Monetary Cooperation in East Asia

V. Conclusion

References

Annex