INTERNATIONAL FINANCE – ASSESMENT 2

1. Do you think “Ideal Currency” is ever possible in 20 years time? Justify your answer.

It’s controversial to choose whether a country should adopt a fixed exchange rate or

flexible exchange rate since both exchange rates provide the same level of benefits to the

economy. However, the ideal currency concept has offered 3 main attributes.

First, exchange rate stability where a stable exchange rate allows the investors to be

certain about the foreign exchange value and to be confident in putting money due to low

risk.

Second, full financial integration where the flow of currency leads to many investor and

traders to happily move fund from one country to another country.

Third, monetary independence where one currency is determined by its own nation

without force from any outsiders.

The main goal of one nation is to reach these 3 factors but it is impossible. As in

economics principles, the tradeoff between 2 things are always the case and you must

choose one to give up another one. The same idea is applied in this ideal currency. The

country cannot obtain all 3 factors even though it attempts to implements the three state

of this trinity. For example, a country with a pure float exchange rate regime can have

monetary independence and high degree of financial integration with the outside capital

markets, but the result must be a loss of exchange rate stability (as in US).

About these ads2. Can ASEAN implement one currency as the European Union? Justify your points with

Relevant examples.

The benefits of having one currency are usually considered to be lower transaction cost,

reduced exchange risk and price stability. It is tempting to think that a single ASEAN

currency would become one of the major currencies in the world and enhance ASEAN’s

role as a global player.

While the benefits of trade integration can be enjoyed without too many prerequisites, the

benefits of monetary integration, especially one currency are harder to attain. When

countries enter a monetary union, they give up the power of monetary policy. They

consequently have to accept the interest rates set by the regional central bank and cannot

use interest rate to smoothen their business rotation.

The Euro zone clearly does not fulfil these criteria. Levels of economic development

differ even more than within Europe. The ASEAN countries that have a higher share of

services and manufactured goods in their GDP have very different business cycles than

those countries. That rely more on the production of raw materials. Most countries in

ASEAN have not yet reached economic maturity. For some countries there is a lot of

room for growth, and some are already growing very rapidly. Such take-off growth

periods are not that of stability.

The benefits of single currency can only be enjoyed when the region has become an

optimal currency area. Attempting a single currency before that time may lead to

expensive bumps further down the road.