Examining the Case for an Asian Monetary Fund

This paper explores the case for an Asian Monetary Fund (AMF) in light of the East Asian crisis. It discusses the role of such a regional facility, and attempts to clarify important issues such as its functional relationship to the IMF. Available evidence stresses that contagion is largely a regional phenomenon. It has become legion in the economics literature to separate transmission channels that cause crises to be contagious across countries into two categories. Those that are related to investor sentiment or psychology are termed "pure contagion". Those that are based on linkages between countries that are measurable/observable pre-crisis, are referred to as "spillovers" or "interdependencies" (these could be due to trade, direct investment or financial linkages). Both theory and evidence suggest that pure contagion is not necessarily random or arbitrary. Thus, in the case of the East Asian crisis, it is notable that the countries initially and worst-impacted were the ones with the "worst economic fundamentals" to begin with. Stronger, though much more open and regionally integrated economies (such as Singapore), were much less affected. This underscores the need for the primary focus to be placed squarely on the domestic policy arena. In the East Asian context, this broadly involves strengthening the financial systems and corporate and industrial structures. However, given the fact that regional spillovers or interdependencies are fairly high and growing in East Asia, even relatively strong regional economies can be and have been affected by crises in the weaker neighboring economies. These policy externalities suggest the need for some form of regional cooperation in the financial and macroeconomic spheres. In light of this, there may be merit in considering the creation of some sort of self-standing regional facility in Asia with limited membership (at least initially). The facility should focus primarily on crisis surveillance and prevention at a regional level; while the IMF continues to focus on surveillance at a global level, as well as crisis management and resolution. Any funds dispersed through the regional facility during a crisis period would be done in full consultation with the IMF and in conjunction with the potential recipient pursuing the IMF conditionalities