Is Asian Currency Unit Attractive to East Asian Economies？

Pegging the RMB exchange rate to the Asian currency unit (ACU) has not, at least in the short term, been proved a better solution than pegging to the US dollar or pegging to a G‐3 (US$, Japanese yen and euro) currency basket. Although the Asian currency unit can help Asian economies to keep the relative price of regional currencies stable, the cost of joining a formal regional monetary cooperation is the relinquishment of the autonomy of their domestic policies. Asian monetary cooperation needs to provide more potential benefits if it is to attract Asian economies. We argue that Asian monetary cooperation should be designed to solve the problem of regional trade imbalance, and regional exchange rate policy coordination should be adopted as the first step towards exchange rate cooperation. (Edited by Zhinan Zhang)     

High‐Frequency Contagion of Currency Crises in Asia*

Using daily data from the Asian currency crisis, the present paper examines high‐frequency contagion effects among six Asian countries. The ‘origin’ (of exchange rate depreciation, or decline in stock prices) and the ‘affected’ (currencies, or stock prices) in the daily spillover relationship were defined and identified. Indonesia is found to be the main origin country, affecting exchange rates of other countries. Contrary to conventional wisdom, evidence of high‐frequency crisis spillover from the Thai exchange rate to other currencies was weak at best. There exists a high‐frequency contagion in stock markets among East Asian countries. Contagion coefficients are positively correlated with trade indices, indicating that investors lower their financial assessment of a country that has trade linkage to a crisis origin country within days, if not hours, of a shock.     

Exchange rate movements and foreign direct investment (FDI): Japanese investment in Asia, 1987–2008

The paper estimates the impact of exchange rate movements on foreign direct investment (FDI). By using the panel data of Japanese FDI flows to nine dynamic Asian economies during 1987–2008, the paper finds that (i) FDI declined with a depreciation of the yen against host country currencies; (ii) it increased with exchange rate volatility; and (iii) it was little affected by the Asian financial crisis, especially when disguised financial flows were removed from the data. A novel result concerns the negative response of FDI to the third moment of monthly exchange rate changes: the volume of FDI was smaller when the distribution was positively skewed (i.e., when the yen was biased towards relatively large depreciation shocks). If skewness proxies for expected mean-reverting changes, this supports the idea that source country investors care about the future stream of revenues and returns denominated in their own currency. These results are robust, with other standard control variables having statistically significant coefficients with expected signs.     

Exchange rate systems and linkages in the pacific basin

This paper analyzes the exchange rate systems of 10 Pacific Basin economies and linkages of their currencies with the major currencies. The recent advances in time series analysis, including unit root tests and cointegration tests, are utilized for this purpose. The results suggest that while many Pacific Basin developing economies are inclined to have a peg or crawling peg system and peg their currencies primarily to the U.S. dollar, the influence of the Japanese yen in this region is also strong, especially on the exchange rates of the Asian newly industrializing economies. For Australia and New Zealand, their exchange rates move in tandem.     

Exchange rates,global imbalances,and interdependence in East Asia

The paper analyzes East Asian interdependence in the face of global imbalances. A macro-econometric multinational model is used, describing Korea, Japan, China and the rest of East Asia in their respective relations with the United States as well as with the rest of the world. US imbalances and their expected consequences, notably a depreciation of the dollar and the slowdown of US demand, have rather contrasted effects on East Asian economies, depending on relative magnitudes of the two components. Korea is more affected by the dollar depreciation while China is more exposed to the US slowdown. Japan, less open and less dependent on the US market, is less touched. The correction of East Asian exchange-rate misalignments, which have prevailed since the beginning of the 2000s, would badly affect East Asian economies if undertaken too abruptly. Lastly, the perspective of creating an area of stabilised exchange rates between won, yen and other currencies, organized either as a common currencies basket system or in a regime based on the ACU, is explored preliminarily. Sets of simulations comparing adjustment mechanisms between East Asian countries, with or without the possibility of monetary adjustment, illustrate the cost of precluding exchange-rate adjustments in the case of asymmetric demand shocks.     

The Asian currency crash: were badly driven fundamentals to blame?

This paper examines the extent to which a number of currencies central to the Asian currency crisis were misaligned at the end of 1996. A well-known fundamentals-based exchange rate model, the monetary approach to exchange rate behavior, is used to produce estimates of equilibrium exchange rates for a number of Asian currencies. The estimates, calculated using panel methods, are shown to be consistent with the underlying model. Most significantly, very little evidence of misalignment is found to exist in 1996. This suggests that the cause of the Asian crash cannot be attributed to traditional fundamentals.     

Fear of appreciation in East and Southeast Asia: The role of the Chinese renminbi

Our study brings into light evidence of the important role of the Chinese renminbi in shaping the exchange rate behavior of a select group of East Asian currencies. Results obtained suggest that there is an additional dimension to the ‘fear of appreciation’ or ‘fear of floating-in-reverse’ behavior, initially coined by Levy-Yeyati and Sturzengger (2007) with regard to the experiences of this group of East Asian currencies. In particular, we find that there is a greater degree of aversion to appreciation of these East Asian currencies—specifically, the Philippine peso and the Thailand baht—against the Chinese renminbi than against the US dollar. This heightened fear of appreciation against the Chinese currency confirms that trade competition matters in this part of the world and that this fear to appreciate plays a central role in the exchange rate management of major East Asian currencies. As envisaged, the increasing role of China as a major trading hub in the region as well as globally, implies that the Chinese renminbi would exert a growing significant influence on other currencies in the region.     

The Asian currency crash: were badly driven fundamentals to blame?☆

This paper examines the extent to which a number of currencies central to the Asian currency crisis were misaligned at the end of 1996. A well-known fundamentals-based exchange rate model, the monetary approach to exchange rate behavior, is used to produce estimates of equilibrium exchange rates for a number of Asian currencies. The estimates, calculated using panel methods, are shown to be consistent with the underlying model. Most significantly, very little evidence of misalignment is found to exist in 1996. This suggests that the cause of the Asian crash cannot be attributed to traditional fundamentals.     

The effect of exchange rate volatility on international trade in East Asia

In this paper, we empirically investigate the relationship between exchange rate volatility and international trade, focusing on East Asia. Our findings are summarized as follows: first, intra-East Asian trade is discouraged by exchange rate volatility more seriously than trade in other regions. Second, one important source of the discouragement is that intermediate goods trade in international production networks, which is quite sensitive to exchange rate volatility compared with other types of trade, occupies a significant fraction of East Asian trade. Third, the negative effect of the volatility is greater than that of tariffs and smaller than that of distance-related costs in East Asia.     

Commodity prices and the macroeconomy: An extended dependent economy approach

This paper proposes a straightforward model for analysing the impact of export commodity price fluctuations on open macroeconomies with particular reference to Australia and New Zealand, major commodity exporters in the Asian region. It extends the dependent economy approach, first by re-specifying goods and services production as either exportable, importable or non-tradable, and second by adding a monetary sector to highlight key linkages between commodity prices, the exchange rate, price level, national output and trade account. The framework sheds new light on the phenomenon of ‘commodity currencies’, how exchange rate movements shield national output from terms of trade shocks, the importance of economic openness in this process, and the significance for monetary and exchange rate policy of short term, versus sustained, commodity price movements.     

Nonlinear dependence in exchange rate returns: How do emerging Asian currencies compare with major currencies?

This paper provides a comparative review of the dynamic characteristics of monthly exchange rate changes for five major currencies relative to those of five emerging Asian economies over the last four decades. Using the British pound sterling as the numeraire currency, the data support nonlinear dependence in exchange rates for the less-liquid Asian currencies, while results for the major currencies are mixed. The more recent data indicate rejection of nonlinear dependence in major currencies.     

Yen-synchronization of floating East Asian currencies: A regime-switching regression model and micro-structural analysis

Using a regime-switching regression model, we find evidence of synchronization between the Swiss-franc exchange rates of floating East Asian currencies and the Swiss-franc–Japanese-yen exchange rate over the period 1999–2006. The volatility of Swiss-franc–East-Asian currencies’ exchange rates is higher during the synchronization period than during the de-synchronization period. Contrary to traditional arguments concerning the yen-bloc, we find that the Export-Similarity Index and Foreign Portfolio Investment between Japan and East Asian countries are the two main determinants of yen-synchronization in the region. Finally, micro-structural analysis shows that the weeks of synchronization is greater when the yen is strong for Korea and Taiwan, but there are no asymmetric responses for Thailand, Indonesia, or the Philippines.     

The Dollar-Mark axis

The Dollar-Mark Axis. — Over the last two decades, most European currencies have tended to weaken against the mark as the latter strengthened against the dollar. Moreover, the strength of the response of European cross rates has tended to remain in the same order over time. The paper first sets out the stylised facts of this phenomenon, referred to as the dollar-mark axis, and then tries to identify its determinants. In addition to exchange rate policy, the paper examines the correlation of cyclical fluctuations and trade links and the bias of international investors in the currency composition of their portfolios.     

Managing in the Middle: Characterizing Singapore's Exchange Rate Policy*

It is by now common knowledge that there can be a significant divergence in the de facto versus de jure exchange rate regimes operated by economies. Although much of the recent published literature in Asia has focused on the crisis-hit economies, Korea and Thailand in particular, scant attention has been paid to Singapore, which officially targets its nominal effective exchange rate (around a band). The present paper examines the degree of exchange rate intervention for Singapore using various methods of assessing de facto exchange rate regimes. In the main, we show that although the Singapore dollar is primarily influenced by the US dollar, in keeping with its de jure classification of a basket pegged regime, other major currencies, such as the yen and the euro, also impact the Singapore dollar. There is also evidence to indicate that Singapore uses the nominal effective exchange rate strategically as a policy instrument to satisfy domestic inflation objectives.     

Assessing convergence to purchasing power parity: A panel study for ten OECD countries

Assessing Convergence to Purchasing Power Parity: A Panel Study for 10 OECD Countries. — The paper analyzes whether post-Bretton Woods real exchange rates of ten OECD countries are nonstationary so that long-run purchasing power parity (PPP) can be considered to hold. A test procedure is proposed which treats the various real exchange rates as a panel but still allows to assess the rate of convergence to PPP for each pair of currencies separately. It is shown that long-run (tradables-) PPP holds between all countries analyzed. Rates of convergence to PPP, however, are found to be quite different across countries. For most of the OECD countries convergence takes place faster than previously indicated.     

Economic integration and the foreign exchange

This paper demonstrates effects of economic convergence processes on the foreign exchange behaviour in a monetary modelling approach. Since the exchange rate represents the relative price of two currencies, commonness of stochastic trends between the fundamental determinants of supply and demand of the underlying monies restricts exchange rate movements to transitory fluctuations. In the spirit of optimal currency areas, this has the potential to serve as a criterion for an all-round integration of two economies. Empirically, such a constellation is found between Australia and New Zealand, whereas diverging trends in money and interest rates characterise the relation of Australia towards the US.     

Was it really a dollar peg?: The exchange rate policies of East Asian countries, 1980–1997

This paper examines the exchange rate policies of East Asian countries during the period preceding the currency crisis of 1997, in an attempt to ascertain the extent to which they could be considered, as they frequently are, as a dollar peg. We do so by estimating the implicit weights of foreign currencies in the nominal exchange rate determination of East Asian currencies by means of a time-varying parameter model. The crucial element of our approach concerns how the weight of the Japanese yen was altered in response to the movement of the yen–dollar exchange rate. It is found that, while the weight of the U.S. dollar was large and the weight of the Japanese yen was small for the period as a whole, the weight of the yen was raised in some of the countries in the early 1990s. In particular, the Korean and Malaysian authorities raised the weight of the yen when the yen depreciated against the U.S. dollar, while the Singaporean authorities raised the weight of the yen when the yen appreciated against the dollar.     

从亚洲外汇市场演变看人民币国际化进展

在2001—2004期间,亚洲货币的外汇交易量增长比全球市场更加迅速,其中人民币外汇交易增长特别强劲。对人民币未来预期因素似乎正在加入到美元日元即期汇率形成机制中并对亚洲外汇市场施加着重要影响。总体看来,具有更加弹性汇率的亚洲货币将以有效汇率为导向进行交易,美元的影     

Surfing the waves of globalization: Asia and financial globalization in the context of the trilemma

Using the “trilemma indexes” developed by Aizenman et al. (2010) that measure the extent of achievement in each of the three policy goals in the trilemma—monetary independence, exchange rate stability, and financial openness—we examine how policy configurations affect macroeconomic performances, with focus on the Asian economies. We find that the three policy choices matter for output volatility and the medium-term level of inflation. Greater monetary independence is associated with lower output volatility while greater exchange rate stability implies greater output volatility, which can be mitigated if a country holds international reserves (IR) at a level higher than a threshold (about 20% of GDP). Greater monetary autonomy is associated with a higher level of inflation while greater exchange rate stability and greater financial openness could lower the inflation rate. We find that trilemma policy configurations affect output volatility through the investment or trade channel depending on the openness of the economies. Our results indicate that policy makers in a more open economy would prefer pursuing greater exchange rate stability while holding a massive amount of IR. Asian emerging market economies are found to be equipped with macroeconomic policy configurations that help the economies to dampen the volatility of the real exchange rate. These economies’ sizeable amount of IR holding appears to enhance the stabilizing effect of the trilemma policy choices, and this may help explain the recent phenomenal buildup of IR in the region.     

The ASEAN dollar standard in the post-crisis era: A reconsideration

This paper examines the role of global currencies in ASEAN exchange rate regimes. The investigation considers the post-crisis era from January 1, 1999 through December 31, 2007 and focuses on the five original members of ASEAN (Indonesia, Malaysia, Philippines, Singapore, Thailand) plus Vietnam. Unlike most papers that use classical regression analysis of logarithmic data in first differences to detect the influence of various foreign currencies on particular Asian currencies, this paper considers modern time series analysis more seriously. In particular, this paper finds evidence of cointegration among individual ASEAN currencies and some of the global currencies, indicating a long-run relationship. Examination of the cointegrating vectors yields four main findings. First, there is a notable absence of a clear US dollar standard. Second, the yen is downright unimportant, suggesting that ASEAN currencies are quite far from a yen standard. Third, ASEAN currencies are also quite far from a euro standard. Fourth, and most surprisingly, the UK pound is very important. These results are at odds with the traditional (short-run) regressions which suggest that ASEAN is on a dollar standard, although it is not a perfect dollar standard because coefficients are not at unity and various other currencies are significant in different equations. Hence, the overall conclusion from this research is that there is a wide variety of influences on ASEAN exchange rates in both the long run and the short run. This suggests that ASEAN, as a group, is not pursuing – and is in fact not ready for – a global-currency standard.