Financial integration in Asia

This paper provides a review and appraisal of financial integration initiatives and outcomes in Asia. It provides a synopsis of the principal integration initiatives that have been undertaken in the region since the Asian financial crisis (AFC) in the late 1990s. These include discussions about exchange-rate cooperation and the formation of an Asian Monetary Fund, the establishment of an Asian Bond Fund, and the creation of a multilateral foreign exchange swap agreement under the Chiang Mai Initiative Multilateralization. The paper also notes particular initiatives undertaken in regional groupings such as the ASEAN economies and debates in the People’s Republic of China regarding the sequencing of capital account liberalization in relation to liberalization of domestic financial markets. The paper attempts to measure the evolution of financial integration in the region, relying in turn on so-called de jure measures that codify regulations on international financial transactions on the one hand and on de facto measures that rely on actual international investment positions and asset price co-movements to assess the degree of integration on the other. Attempts to interpret the sometimes, contradictory results of these measurements are given. Finally, the paper briefly discusses the potential consequences of closer financial integration for the effectiveness of monetary policy and introduces two topics that warrant further study; regional versus global financial integration and whether the end goal of a financial integration process should necessarily be the elimination of all restrictions to cross-border financial transactions.