Emerging Asian economies keep their domestic currencies undervalued and build up large forex reserves in the wake of substantial inflows. There are costs of reserve management besides the danger of rise in asset prices, higher volume of government expenditure, and most importantly raising global imbalances. It will be in the interest of East Asia, if the region's major players can put their heads together and take a common position on the exchange rate issue.

In a globalized financial environment, where massive fund flows occur across countries and continents with minimal restrictions, exchange rate management policies acquire great significance, especially in emerging economies of Asia.Principally, there are three exchange rate regimes, namely floating, intermediate and firmly fixed. However, there are subsets like floating corner, free floating and managed floating. Under intermediate regimes, there is band, crawling peg, basket peg and adjustable peg.

Under firm fixing, we have currency boards, dollarization (or euroization) besides monetary unions. Each of the intermediate regimes can itself range firm as flexible as to belong truly in the floating category, to so rigid as to belong truly to the fixed one. In addition, the target zone and the crawl each has two prominent sub classifications: one which the parity is adjusted in line with export inflation and one in which it is not in order to retain some of the benefits of a nominal anchor. There is a substantial difference between de jure classifications and de facto classifications, between what countries say they do and what they actually do.

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