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)     

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.     

Stock market uncertainty and uncovered equity parity deviation: Evidence from Asia

Recently, many empirical studies document that a country's stock market performance relative to the US and its local currency units per US dollar tend to move in opposite direction over the short run, also known as the uncovered equity parity (UEP) condition. However, those studies have applied only to advanced economies to date. This study conducted the same tests to a sample of 18 Asian economies. To one's surprise, we found that the UEP condition reverses its sign among Asian currencies. In addition, measures of stock market uncertainty are suggested as a potential driving force behind this UEP reversal for Asian economies. This surprising result suggests that there might be other mechanisms behind the joint dynamics of equity and currency returns than the portfolio rebalancing caused by incomplete foreign exchange risk hedging. The reasoning is that Asian foreign exchange (FX) markets are even more subject to incomplete foreign exchange risk hedging. Thus, one should expect even stronger UEP evidence from Asian currency markets if the portfolio rebalancing mechanism was the only force at play.     

亚洲区域汇率的短期变动——对亚洲货币单位(AMU)月度指标的检验

在亚洲汇率合作进程中,区域篮子货币的设想最为引人注目。本文针对Ogawa等(2005)推出的亚洲货币单位(AMU)指数,运用月度数据对双边汇率变动进行说明,试图揭示影响区域货币对AMU汇率变动的主要经济因素和国别差异,评价AMU作为区域篮子货币的合理性。实证结果表明,区域各主要经济体与货币篮子之间的汇率变动具有某些共同特征,汇率表现的时间惯性基本一致,对美元汇率比较敏感,这意味着将上述指标纳入到区域汇率合作监控体系下具有现实合理性,但是影响变量的差异同时也意味着汇率合作上仍将面临很大的挑战。     

Proposal for a common currency among rich democracies

This paper proposes the creation of a common currency for the industrialized democracies, notably the United States, the European Union, and Japan. A common currency implies a common monetary policy; institutional arrangements for which are discussed. The rationale rests on the assumption that asymmetrical financial shocks will become more important than asymmetrical real shocks for these large, diversified economies, and that one of the growing sources of financial shocks will be changing expectations about exchange rate movements among national currencies. These financial shocks will in turn disturb real economies, such that flexible exchange rates among major currencies will increasingly become sources of shock more than shock absorbers. Such a common currency would also make it much easier for emerging markets to frame their monetary and exchange rate policies.     

Exchange-rate policy in East Asia after the fall: how much have things changed?

This paper evaluates the changes in the exchange-rate policies of East Asian economies in the aftermath of the currency crisis and the process in which the exchange-market stability was re-established. The empirical analysis evaluates the changing roles of the yen and the US dollar in the currency baskets, the shifts in the volatility of the underlying macroeconomic fundamentals and their implications on exchange-rate management, the exchange-market perception of credibility and risk of the postcrisis exchange-rate regimes, and the process of reversion to fundamental values after the massive currency depreciation.The analysis shows that after the abandonment of the quasi-dollar peg, the yen had gained a greater weight in the currency baskets and the greater flexibility in which the exchange rates are being managed serve to accommodate the greater volatility in the macroeconomic fundamentals. The improvement in the macroeconomic conditions and the greater credibility that has been acquired by the regional monetary authorities had allowed the exchange market to stabilize and enabled the exchange rates to revert back to their fundamental values.     

美国对外负债的可持续性与国际货币体系的未来

要回归到某种形式的固定汇率制度,需要对国际资本流动进行全面且国际性的管制,乃至各国放弃管理货币制度下行使的金融主权。从经济、政治和政策上考虑,这两种要求都无法实现。欧元、日元、人民币甚至把合成货币(SDR)都考虑在内,也难以想像在可以预测的未来(21世纪中叶为止)能够出现替代美元的货币。美国的对外资产和负债之间有正的投资回报差额,这一差额在长期内将一直存在。只要这种回报差额持续存在,并且对外资产和负债占GDP的比率能够按照一定的速度扩大,那么即便美国的贸易收支逆差占GDP的比率维持在4%左右,其对外纯负债占GDP的比重维持稳定状态的可能性也是很大的。因此,以美元为中心的、由多数主要货币构成的现行浮动汇率制度具有很强的可持续性,以至于完全有可能在今后继续存在。     

Restaurant Prices and the Mexican Peso

Of prime interest to border economies is exchange rate performance and currency valuation. Commonly used tools for this task include purchasing power parity (PPP) nominal benchmarks, and inflation-adjusted trade-weighted indices. The latter have the advantage of relying on commonly available international macroeconomic data but overlook microeeonomic information that may offer additional insight to issues surrounding exchange rate policy debates. Other efforts have utilized small samples of international product price comparisons to shed light on currency valuation questions. This paper develops one such tool by repeated sampling of prices charged for identical menu items sold at restaurant franchises in El Paso, Texas, and Ciudad Juárez, Chihuahua. A battery of statistical tests indicate that the international currency value of the peso consistently differed from the exchange rate implied by the border region restaurant price ratios in 1997, 1998, and 1999.     

The Quantitative Importance of the Expenditure-Switching Effect

This paper investigates the quantitative importance of the expenditure-switching effect in three small open economies: Australia, Canada and the UK, by developing and estimating a structural sticky-price model nesting both producer currency pricing (PCP) and local currency pricing (LCP) settings. The size of the expenditure-switching effect is determined by the degree of price stickiness, the fraction of firms employing PCP versus LCP, the distribution margin, and the elasticity of substitution between domestic and foreign goods. Our estimation results suggest that the expenditure switching role of the nominal exchange rate is larger for Australia and Canada than for the UK, mainly due to the relatively smaller distribution margins in those two countries.     

货币互换协议、金融市场与中国对外直接投资

基于2003-2018年169个国家的面板数据,文章利用多期双重差分方法探讨了货币互换协议对我国对外直接投资规模与密集度的影响,并通过PSM-DID方法和证伪检验对模型的稳健性进行验证。在此基础上,运用中介效应和调节效应检验方法对货币互换政策的金融市场作用机制进行分析。研究发现,货币互换协议对我国OFDI规模与密集度均有显著积极影响;预期汇率风险是货币互换协议促进我国OFDI的重要影响机制,中介传导而非调节效应是主要影响渠道,而利率市场的影响机制尚未发挥作用。在经济全球化和复杂的国际形势下,这一研究对我国进一步推动国家间金融领域深化合作和推进人民币国际化以畅通国内国际双循环具有重要参考价值。     

美国量化宽松政策对新兴经济体股票市场价格的影响

2008年金融危机后美国采取量化宽松货币政策造成大量流动性进入新兴经济体股票市场。通过建立面板VAR模型,运用脉冲响应函数和方差分解技术分析了美国货币供应M1、股票市场以及联邦基金利率透过汇率、利率和预期方式对新兴经济体股票市场价格指数产生的影响。结果表明,美国量化宽松货币政策对新兴经济体股票市场价格具有正向溢出效应,利率渠道影响效果显著。     

Optimum Currency Areas in Emerging Market Regions: Evidence Based on the Symmetry of Economic Shocks

This paper examines which emerging market regions form optimum currency areas (OCAs) by assessing the symmetry of macroeconomic shocks. We extend the output-prices-VAR framework by adding net exports and the real effective exchange rate as endogenous variables. Based on theoretical considerations, we derive which shocks affect these variables in the long run: shocks to labor productivity, foreign trade, labor supply, and money supply. The considered economies of Central and Eastern Europe, the Commonwealth of Independent States, East and Southeast Asia, and South Asia, exhibit large enough shock symmetry to form a currency union; the economies of Africa, Latin America, and the Middle East do not.     

Twin Banking and Currency Crises and Monetary Policy

Currency crises are found to be strongly associated with banking crises. This paper constructs a twin banking and currency crisis model by introducing the banking sector into the currency crisis model and examining the case in which the exchange rate risk is located in the banking system. The model shows that an unanticipated shock caused by the shift of investors’ expectations and/or a negative productivity shock can trigger a twin banking and currency crisis. To achieve both financial stability and economic stability, the central bank uses multiple monetary policy instruments. In contrast to the conventional policy recommendation in response to a currency crisis, i.e., interest rate hike, we find that when the exchange rate risk is located in the banking sector, the monetary policy option to prevent a twin crisis is to lower the policy interest rate and the reserve requirement ratio and raise the interest rate on reserves. Our results show that the location of the exchange rate risk matters for the choice of an appropriate monetary policy response during a crisis.     

Should East Asia’s currencies be pegged to the yen? The role of invoice currency

Growing concern that a dollar peg exposes East Asian economies to fluctuations in the dollar–yen exchange rate has stimulated research on currency basket regimes as alternatives for these economies. However, existing studies have mostly ignored an important characteristic of East Asia, i.e., most of its international trade is invoiced in the U.S. dollars. This paper investigates how the preponderance of dollar invoicing affects optimal currency basket regimes for East Asian economies. I develop a three-country center-periphery sticky-price dynamic stochastic general equilibrium model for the analysis. The model is solved numerically by taking second-order approximations to the policy functions with the expected lifetime utility of households chosen as the welfare criterion. Contrary to the conjecture of existing literature, I show that predominance of dollar invoicing implies that the dollar should receive a smaller weight than suggested by bilateral trade shares between emerging markets in East Asia and the United States. The results hinge on the interaction of different degrees of pass-through implied by the choice of invoice currency and endogenous responses of monetary policies in the center countries.     

Self-Fulfilling Currency Crises with Borrowing Constraints and Domestic Currency Debt

This paper presents a model of self-fulfilling currency crises in economies that do not suffer from domestic liability dollarization but whose international borrowing is subject to a collateral constraint. The model shows that when the collateral is a non-traded asset the expectation of a real exchange rate depreciation may trigger the constraint and cause a crisis in which the capital outflow and the real depreciation reinforce each other. Since in the model debt is denominated in domestic currency this paper highlights that borrowing constraints can cause self-fulfilling currency crises even in the absence of foreign-currency debt.     

Overcoming the zero bound on nominal interest rates: Gesell’s currency carry tax vs. Eisler’s parallel virtual currency

Despite the zero lower bound on the short nominal interest rate in Japan having become a binding constraint, conventional monetary policy in Japan, in the form of generalised open market purchases of government securities of all maturities, has never been pushed to the limit where all outstanding government debt and all current and anticipated future government deficits are (or are confidently expected to be) monetised. Open market purchases of private securities can create serious governance problems. Two ways of overcoming the zero lower bound constraint have been proposed. The first is Gesell’s carry tax on currency. The second is Eisler’s proposal for the unbundling of the medium of exchange/means of payment function and the numéraire function of money through the creation of a parallel virtual currency. This raises the fundamental issue of who chooses or what determines the numéraire used in private wage and price contracts—an issue that is either not addressed in the literature or addressed incorrectly. On balance, Gesell’s proposal appears to be the more robust of the two.     

Currency Exposure in China under the New Exchange Rate Regime: National Level Evidence

The present paper studies China's national level currency exposure since 2005 when the country adopted a new exchange rate regime allowing the renminbi (RMB) to move towards greater flexibility. Using generalized autoregressive conditional heteroskedastic and constant conditional correlation‐generalized autoregressive conditional heteroskedastic methods to estimate the augmented capital asset pricing models with orthogonalized stock returns, we find that China equity indexes are significantly exposed to exchange rate movements. In a static setting, there is strong sensitivity of stock returns to movements of China's tradeweighted exchange rate, and to the bilateral exchange rates except the RMB/dollar rate. However, in a dynamic framework, exposure to all the bilateral currency pairs under examination is significant. The results indicate that under the new exchange rate regime, China's gradualist approach to moving towards greater exchange rate flexibility has managed to keep exposure to a moderate level. However, we find evidence that in a dynamic setting, the exposure of the RMB to the dollar and other major currencies is significant. For China, the challenge of managing currency risk exposure is looming greater.     

The choice of an invoicing currency in international trade and the balance of trade impact of currency depreciation

Cross-country differences in the choice of an invoicing currency in international trade is one reason for cross-country differences in estimated exchange rate coefficients in short-run balance of trade equations. If exports are invoiced in domestic currency while imports are invoiced in a foreign currency, a depreciation will increase the domestic currency value of outstanding import contracts, and may cause the balance of trade to fall in the short run. Countries with different invoicing patterns will have different effects on the short-run trade balance following a depreciation. We explore a simple theory of invoicing currency choice, drawing inferences regarding the likely choices for 14 countries. This allows a classification of countries according to the expected short-run balance of trade effect of a currency depreciation. Empirical estimates support the hypothesized groupings based on suggested currency invoicing patterns.     

Sovereign Spreads and Contagion Risks in Asia

In the aftermath of the recent global financial turmoil, sovereign spreads have exhibited a significant degree of volatility. This paper explores how much of these movements in the spreads of Asian economies reflected shifts in global risk aversion or country‐specific risks, directly from worsening fundamentals, or indirectly from spillovers originating in other sovereigns, or risks and uncertainty surrounding their exchange rates. This analysis finds that earlier in the crisis, the increase in market‐implied contagion led to an increase of sovereign bond yields relative to the swaps. Higher‐rated sovereign bonds in Asia benefited from the flight to quality that accompanied the increase in global risk aversion during this period. Once the systemic risks in the financial sectors worldwide were contained, the risk of sovereign spillovers eased, which, together with a fall in perceived currency‐related risks, led to a fall in sovereign bond yields relative to swaps yields across the board. Comparing the situation to that of Europe, the present paper concludes that the debt crisis in the euro area has not affected the perception of sovereign risks of Asian economies. In fact, a fall in exchange rate and spillover risks, combined with stronger fundamentals, have led to a continued normalization of Asian sovereign spreads since the height of the financial crisis.     

Why floating exchange rates fall: A reconsideration of the liquidity trap

In the international capital market, interest rates would seem to be natural shock absorbers for balancing currency risk associated with expected inflation or differential taxation. Under a floating exchange rate, however, short-term interest rates in each national money market behave as if caught in a liquidity trap. The problem arises because the domains for national monetary circulation remain somewhat disjoint even though the bond market is fully integrated internationally. The national rate of interest is ncapable of equilibriating the domestic money market on the one hand and the international bond market on the other. The result is excessively high exchange-rate volatility that distorts the flow of international commodity trade and causes cycles of inflation and deflation in open economies.