But this overlooked a crucial feature of monetary unions free capital mobility and elimination of currency risk indispensable attributes of a currency area could be (and were) the source of asymmetric shocks. Currency unions, in other words, must worry about endogenous as much as exogenous shocks.

China s Monetary Sterilization

Successful coordination in fiscal and monetary affairs would enable the region to manage external shocks successfully.

In China, unlike in advanced countries, monetary and sterilization policy are often one in the same. The degree to which monetary policy is expansionary depends on the degree to which the liquidity created by currency market intervention has been sterilized.

Those reserves consisted of four times the volume of currency in circulation, which was important to protect against speculative attacks on the domestic currency.

The factors leading to the deep debt crisis culminating in the 2005 debt restructuring were characterized by the conjunction of policies (constraints on monetary, exchange rate and public borrowing policies imposed by the currency board) and external shocks (devaluation of the Brazilian currency in 1999, Asian and Russian financial crises in 1998).

The irony here is that the impetus toward currency union was partly a result of the recognition of asymmetries. Thus, in the aftermath of the sterling and lira devaluations of the early 1990 s, with their resulting adverse trade shocks to France and Germany, the lesson that was drawn was that a single currency was needed to prevent such disparate shocks from recurring.

19. Rapid recovery appeared unlikely, mainly because of the slowness of some Governments to undertake the appropriate fiscal and monetary measures and the effect of external shocks but also because speculators had lost confidence in the region s currencies.

African Centre for Monetary Studies

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International Monetary Fund (IMF)

The first concerns the growing imbalances in the monetary and financial systems that expose the global economy to shocks that are beyond any national capacity to control.

The managers of these new safe haven currencies are now desperately seeking at least a temporary peg or some system of bands relative to the exchange rates of their big neighbors. Such a policy is fraught with danger indeed, it is inherently self defeating, as the establishment of a peg or a band provides an obvious target against which speculators can take huge positions.

Monetary Mystification

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Finally, once the crisis hit, leading to a re pricing of risks in financial markets, the need to avoid an economic and financial meltdown compelled governments to support aggregate demand and make private liabilities whole. But the disconnection between centralized monetary and decentralized fiscal powers de facto impeded the full use of monetary instruments to meet monetary and financial shocks.

CONTRIBUTIONS TO PRODUCTIVE AND REPRODUCTIVE

Mr. J. P. Nicoson International Monetary Fund (IMF)