Plausibility of Local Currency Contribution to the CMIM

Abstract

This study assesses the plausibility of local currency contribution to the Chiang Mai Initiative Multilateralization (CMIM) arrangement. First, we investigate the (net) demand for local currencies in foreign exchange reserves because introducing local currency contribution is efficient only when sufficient demand exists. The main results are as follows. i) Substantial demand exists for local currencies in foreign exchange reserves. ii) The size of the demand for local currencies in foreign exchange reserves is large in comparison with the size of the maximum withdrawal from CMIM. iii) Net demand for local currencies in CMIM tends to be positive. Second, the stability of local currencies is analyzed by calculating the exchange market pressure index because costs of local currency contribution to CMIM arrangements can be high if local currencies are unstable. The results suggest that several currencies of ASEAN+3 members are as stable as popular non-U.S. international currencies for various sub-periods. The results in terms of stability of the currency, internationalization of currency, and liberalization of capital account transactions, indicate that the Japanese yen, Chinese yuan, and Korean won could first be considered eligible for local currency contribution to CMIM arrangements. Overall, the results may support the idea of introducing local currency contribution to CMIM arrangements.