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Research on Cross-Straits’ Monetary Cooperation

Author: LiuYuRen
Tutor: CaoXiaoHeng
School: Nankai University
Course: Regional Economics
Keywords: Cross-Straits Monetary Cooperation Optimal Currency Area Economic Foundation Model and Path
CLC: F822
Type: PhD thesis
Year: 2013
Downloads: 43
Quote: 0
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Abstract


Regional monetary cooperation is the core issue of the current world economic and financial areas. Research on monetary cooperation can be traced back to1958when Triffin presented the single international monetary theoretical concept. After that, Mundell and other scholars constantly improved the theory, forming a series of modern monetary cooperation theories. One of the most significant representatives is the theory of optimal currency area (OCA). This theory believes that monetary cooperation is dynamic process during which the cooperation evolves from lower form to the higher form, and develops from the loose form to the compact form. This process is also known as the monetary integration process, whose highest form is monetary union that only single currency exists in one region. The theory also believes that the inherent power of monetary cooperation comes from the increasingly close economic relations between the partners; more closely monetary and financial policies integrate in the region, more balanced and stable the region will be.The Monetary Cooperation is also a reality concept. More and more countries and regions reach a consensus on the necessity and importance of strengthening the international and regional monetary cooperation. The concept of "one country, one currency" gradually transformed into that of "a market, one currency". In1999, the birth of the euro, the pan-dollarization in Latin America and other countries and the region’s economic and monetary integration in East Asia has made a practice interpretation. The outbreak of Asian financial crisis in1997and the global financial crisis in2008enhanced the importance and the necessity of regional monetary cooperation greatly. To study the issue of monetary cooperation is more necessary and has practical significance.Mainland and Taiwan are both at the East Asian region. Cross-Straits’ monetary cooperation is the part of East Asia regional cooperation. Due to the special nature of cross-straits relations, currency cooperation studies are often simplified or ignored. There is no in-depth analysis devoted to cross-straits’currency cooperation, and also there will be no powerful theoretical weapons for guiding the practice of currency cooperation between Mainland and Taiwan. On the other hand, since2008under the theme of peaceful development of cross-straits and initial formation of the political and economic interaction situation, commodity trade, people and money have frequent warm interactions. After MOU and monetary settlement agreement, the academia, the business communities and the general public are all looking forward to intensifying on cross-straits’currency cooperation. In the above context, research on cross-straits’currency cooperation not only has certain advance and theoretical meanings, but also is of great practical significances.Based on the optimal currency area theory, this paper constructs a research system to measure the real economic basement for cross-straits’currency cooperation, and further, explores the feasibility of the cooperation to a higher levels, and points out that the impact factors in the process of monetary cooperation. On the basis of a comparative analysis of the world’s major regional monetary cooperation practices, this paper also fingers out the possible modes and paths for the cross-straits’currency cooperation. The full text is divided into seven chapters. Chapter Ⅰ introduces the research backgrounds, research contents and methods. Chapter Ⅱ clarifies the concept of monetary cooperation, its contents and process, and gives preliminary analysis of the status and progress of cross-straits’ currency cooperation. In chapter Ⅲ optimum currency areas theory and relative literatures are reviewed. Chapter IV establishes a research system of cross-straits’monetary cooperation and analyzes the feasibility to a higher levels for the cooperation, and indicates the main factors that affect the process of cross-straits’ monetary cooperation. Chapter Ⅴ gives the comparative analysis of three typical cooperation practices, including the "dollarization" of the Latin American countries, the single European currency and monetary cooperation in East Asia, and sums up the experience and inspiration. Chapter VI is about the possible modes and paths for cross-straits’ monetary cooperation, and finally policy recommendations are given.The main conclusions are as follows:Firstly, the analysis of the cross-straits’ monetary cooperation in the field of the status and progress shows that cross-straits’ monetary cooperation is now in the early stages. If wanting to move to the higher level of monetary cooperation, we need to overcome many problems and difficulties. Along with that, political factors and institutional backwardness are the most significantly important non-economic influencing factors. Political factors, especially the external factors represented by the U.S.A have increased the complexity of the monetary cooperation; monetary cooperation in East Asia provides the experience that strong politics can break through the economic barriers; besides, political relations between the two sides decide the direction of monetary cooperation.Secondly, according to the theory of optimal currency areas (OCA), this paper constructs a research system to measure the real economic basement for cross-straits’ currency cooperation. The system consists of three levels of study, including the static single indicators measurement, the static OCA index model and dynamic endogenous constraint test. The static single indicator measurement and the static OCA index model are both come to the conclusions that there are no current economic foundations for the cooperation moving to the higher stage. But the results of endogenous dynamic model test show that the macroeconomic convergence and bilateral trade ties have significantly positive relationship, satisfying the endogenous hypothesis constraints conditions. That means the current costs of cross-straits’ monetary will be made up by the future profits after the currency area comes true. Building optimal currency areas is still possible.Thirdly, through investigating the economic bases of cross-straits’monetary cooperation, this paper identifies the factors that affect the progress of monetary cooperation. The large difference between Mainland and Taiwan in economic scales and the close bilateral trade ties are the two main impact factors. Further, the former leads to the costs of cooperation and the latter results in the benefits. The results of static analysis show that the costs from the differences in economic scales exceed the benefits coming from the close trade relations. Therefore, the foundation to higher stages of monetary cooperation does not exist. However, dynamic analysis shows that, the current net cooperation costs will be compensated by the benefits from the prospective OCA.Fourth, as to the monetary cooperation models and paths, the paper argues that RMB can be used as the core currency of the cross-straits’ monetary cooperation. The reasons are that on the one hand, RMB has certain regional influence, the process of internationalization of RMB making it a quasi-international monetary and that on the other hand, the internationalization of the RMB and the cross-straits’monetary cooperation can complement each other and promote each other. Selecting RMB as core currency will further enriches the contents of cooperation, and make the cooperation progress more smoothly. This paper also believes that in the short term, Mainland and Taiwan should continue to strengthen comprehensive economic ties on the basis of establishing currency settlement mechanism and set up information exchange mechanism, and build a unified formation for consultation and discussion of financial monitoring problem, and accelerate the establishment of the implementation of cross-straits’ currency swap mechanism, and increase the use of domestic currency to support cross-straits’ trade. In the medium and long term, cross-straits should promote the unification of the exchange rate policy as well as the unified monetary policy in order to make one kind of currency in use. Finally, this paper considers that RMB being the settlement currency in cross-straits’ trade and establishing the RMB offshore financial center in Taiwan, are the main contents of the monetary cooperation recently, and some relevant proposals are given.

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