AMU Deviation Indicators for Coordinated Exchange Rate Policies in East Asia and their Relationships with Effective Exchange Rates

After the Asian currency crisis in 1997, the monetary authorities of East Asian countries have been strengthening their regional monetary cooperation. In this paper, we propose a deviation measurement for coordinated exchange rate policies in East Asia to enhance the monetary authorities’ surveillance process for their regional monetary cooperation. We calculate an Asian Monetary Unit (AMU) as a weighted average of East Asian currencies following the method used to calculate the European Currency Unit (ECU). Also, we calculate AMU Deviation Indicators which show how much each of the East Asian currencies deviates from a hypothetical benchmark rate in terms of the AMU. Furthermore, we investigate relationships between the AMU Deviation Indicators and the effective exchange rates, which mean international price competitiveness in terms of international trade. We found strong relationships between the AMU Deviation Indicators and the effective exchange rates except for some currencies. The results suggest that monitoring the AMU Deviation Indicator will be useful for the monetary authorities’ surveillance in East Asia in order to stabilise their effective exchange rate or price competitiveness among the East Asian countries.     

Real Output Co‐movements in East Asia: Any Evidence for a Monetary Union?

The East Asian region has experienced astonishing economic growth and integration over the past few decades. It is generally believed that a high degree of integration in the region would greatly shape the economic structure of each individual economy and has direct implications for the effectiveness of domestic stabilisation policy and policy coordination. This paper empirically examines the feasibility of forming a monetary union in East Asia by assessing the real output co‐movements among these economies. As suggested by the optimum currency area (OCA) theory that losing monetary independence would be the major cost for adopting a common currency, it would be less costly for the economies to form a monetary union if the business cycles are synchronised across countries. The cointegration test and the Vahid and Engle (1993 ) test for common business cycles are conducted to examine their long‐run relationship and short‐run interactions in real outputs, respectively. Our study found that some pair countries in the region share both the long‐run and short‐run synchronous movements of the real outputs. In particular, the short‐run common business cycles are found in some pairs of ASEAN economies consisting of Singapore, Thailand and Indonesia, and in the Northeast Asian region consisting of Hong Kong, Korea and Mainland China, as well as between Japan and Taiwan. These findings have important implications for the economies in terms of adjustment costs when considering the adoption of a monetary union.     

Monetary policy spillovers and currency crisis in comparative perspective: East Asia before the 1997 crisis and Eastern Europe after tapering

This paper estimates the possibility of currency crisis in Eastern Europe that can be triggered by monetary policy change in the key currency countries, such as tapering measure. We examine the crisis possibility in the five Eastern European nations—the Czech Republic, Poland, Hungary, Bulgaria and Romania—by performing a comparative analysis with East Asian countries before the 1997 currency crisis. For the analysis, we estimate how much the exchange rate deviates from the estimated equilibrium exchange rate, as well as the synchronicity of currency value towards some of the key currencies by creating market pressure index. The results can be explained in two ways. First, the market pressure in the Eastern Europe after 2012 is smaller than they were in East Asia before 1997. The crisis possibility especially intensifies when more the exchange rate deviates from the equilibrium value. Second, the monetary policy change in the key currency countries does not greatly affect the crisis possibility in Eastern Europe when their local currencies have the strong synchronisation with euro. Therefore, Eastern European countries show strong synchronicity towards the euro, so the crisis possibility may be alleviated if the Eurozone continues its expansionary monetary policy.     

从欧洲货币一体化看东亚货币区的建立

欧洲货币一体化的实践验证了最优货币区理论。作者以欧洲货币区的适应发展为参照 ,根据最优货币区理论所提出的标准 ,分析了东亚地区实行单一货币的可行性 ,结论是 ,东亚各国与欧元成员国相比存在很大差距 ,在很多方面尚不能满足建立最优货币区的基本条件 ,因此 ,要建立东亚货币区还任重道远。     

East Asia's Anti‐dumping Problem

East Asia accounts for a large and growing share of worldwide anti‐dumping (AD) activity. East Asian countries have long been the main targets of AD actions, accounting for about one‐third of all AD actions during the 1980s, more than 40 per cent of all AD actions during the 1990s, and almost 50 per cent of all AD actions in recent years. After controlling for factors that might influence filings such as the exchange rate and trade volume, it is found that East Asian countries are subject to about twice as many cases as either North American or Western European countries. Moreover, the trend in filings against East Asian countries is increasing, meaning that in recent years the propensity for countries to direct their AD filings against East Asian countries is growing. One concern is that the growing intensity of AD use against East Asia is driven by China‐PRC. Importantly, but a rising propensity is found even excluding China‐PRC.     

The arrival of the Euro and its implications for Asia

The third stage of the European Economic and Monetary Union (EMU) commenced on January 1, 1999 with the launch of the European single currency, the euro. The first round of participants comprises 11 of the 15 European Union (EU) nations, dubbed “Euroland.” The potential implications of EMU for Asia are immense. The euro's emergence as an international currency and its impact on Asia can be assessed in 3 different domains: (1) as a medium of exchange for Europe's trade with Asia; (2) as a store of value in stocks and bonds in world capital markets; and (3) as part of official foreign exchange reserves of Asian central banks. Our analysis suggests that there is potential for the euro to play a bigger role in EU-Asia trade links, which will be underpinned by the collective importance of Euroland as a much-enlarged trading and investment partner for Asia. However, in the short term at least, Asian equity markets are unlikely to benefit from significant inflows of capital from the EU as the former have been decimated by the region's financial crisis. As for Asian bond markets, rapid deterioration of sovereign ratings of countries in the region over the past 12 months would make it difficult for Asian companies to raise funds through euro-denominated debt instruments. As for official foreign exchange reserves, the bulk of Asian reserves is currently held in US dollar assets. Judging from Asian trade and debt figures, it seems unlikely that the euro would challenge the US dollar as a reserve currency any time in the near future. Nevertheless, in the longer term, the euro's introduction could make it easier for Asian central banks to diversify their reserves from the greenback to the euro. The internationalization of the euro is likely to happen only gradually, whether in terms of international trade denomination and settlement, denominating international financial assets, or as a reserve currency. Since the magnitude of shock that the single European currency would bring to the international monetary system is still unknown, only very tentative conclusions for the impact on Asian countries can be drawn at this point in time.     

A Political Economic Critique on the Theory of Optimum Currency Areas,and the Implications for East Asia

In recent years, dynamic debate has arisen as to the desirability and feasibility of creating a monetary union in East Asia. While the debate has relied heavily on the theory of optimum currency areas, this theory has weaknesses in explaining the actual formation of monetary unions. At this point, political economy analysis appears to demonstrate stronger explanatory power. This paper provides a systematic review of the main developments in the literature on optimum currency area theory and in the political economy literature on monetary union. In addition, it addresses the feasibility of an East Asian monetary union, by applying the findings in these two academic strands to the region. It finds that even though formation of an East Asian monetary union may be to some extent feasible from an economic perspective, the region’s political situation does not appear favourable for the creation of one.     

东亚货币合作的经济基础——基于Frankel-Rose内生性假说的新检验

本文以两大主流货币合作假说为理论背景,着重借鉴了Frankel-Rose内生性假说的分析框架,研究东亚地区经济一体化的动态特征对于该地区货币合作,即货币统一进程的制约与影响。主要结论表明,随着东亚地区各国间贸易联系的日益密切以及经济趋同性的进一步提高,最优货币区标准会在其建立之后得到自发优化。东亚货币合作内生性假说的成立势必会降低在该地区开展货币合作的成本。     

Who Can Adjust to the Euro?

This study estimates potential exchange rate variation among 26 European countries during 1992–1998, as a proxy for the potential magnitude of adjustment they face to euro‐block membership, using the instrumental variable (IV) method, applying least squares cross‐section regression analysis based on optimal currency area theory. A currency union among Belgium, Denmark, France, Germany, Ireland, Malta, the Netherlands and Slovenia is found to entail a relatively light burden of adjustment for its members. The current membership of other countries in the euro‐block is potentially very demanding on their societies in the long term. This study also compares currency boards and independent central banks as alternative monetary frameworks for disinflation policies. Based on a pooled time‐series, cross‐section dataset of the same countries and years currency boards are found to be more effective in reducing inflation in all countries except Belgium. Balancing EMU's credibility gains against its adjustment costs, Finland, Greece, Italy, Portugal and Spain seem like unstable members of the euro‐block. For all new EU member states except the Czech Republic, Malta, Slovenia and Slovakia the advice is to stay out of the euro‐block until their economies are liberalised and flexible enough to withstand major adjustments, and their societal interest groups supportive enough of these adjustments.     

东亚经济冲击对称性分析与东亚货币合作

经济冲击的对称性程度,是判断一组经济体是否可以进行货币合作的一个良好指标。本文在前人研究的基础上,对经济冲击的分解变量进行了重新选择,将东亚9个经济体的经济冲击分解为供给冲击、需求冲击和货币冲击。静态与动态实证结果都显示东亚目前的冲击对称性程度还不高。未来东亚货币合作的方向,除了在整体上继续推动东亚各经济体在各领域的合作外,重点是要推进大国之间的经济合作与协调。     

Is the US Dollar a Suitable Anchor for the Newly Proposed GCC Currency?

Responses of inflation and non‐oil output growth from the Gulf Cooperation Council (GCC) countries to monetary policy shocks from the United States (US) were estimated to determine whether there is evidence to support the US dollar as the anchor for the proposed unified currency. A structural vector autoregression identified with short‐run restrictions was employed for each country with Fed funds rate as the US monetary policy instrument, non‐oil output growth and inflation. The main results suggest that for inflation, the GCC countries show synchronised responses to monetary policy shocks from the US which are similar to inflation in the US, and for non‐oil output growth, there is no clear indication that US monetary policy can be as effective for the GCC countries as it is domestically. Consequently, importing US monetary policy via a dollar peg may guarantee only stable inflation for the GCC countries – not necessarily stable non‐oil output growth. If the non‐oil output response is made conscientiously – and there are concerns over the dollar’s ability to perform its role as a store of value – a basket peg with both the US dollar and the euro may be a sound alternative as confirmed by the variance decomposition analysis of our augmented SVAR with a proxy for the European short‐term interest rate.     

Business cycle synchronisation in East Asia: The role of value‐added trade

We empirically investigate the relationship between business cycle synchronisation and the role of value‐added trade focusing on a panel of 12 Asian countries from 1995 to 2011. In addition, we propose the inclusion of two novel determinants, for example external value‐added trade intensity and exchange rate volatility and also saturate our empirical model with other common determinants found in the literature. Our findings first confirm that value‐added trade intensity, rather than gross trade intensity, has a sizable, positive and statistically significant impact on synchronisation among East Asian countries. Second, the exchange rate volatility has a significant negative effect on the business cycle synchronisation, which verifies that the exchange rate volatility is another important determinant of business cycle synchronisation. Our findings have important implications for the monetary cooperation in the region: strengthening trade linkage could reduce the costs of monetary cooperation by increasing the incidence of symmetric shocks.     

Financial versus Monetary Mercantilism: Long‐run View of Large International Reserves Hoarding

The sizeable hoarding of international reserves by several East Asian countries has been frequently attributed to a modern version of monetary mercantilism – hoarding international reserves in order to improve competitiveness. From a long‐run perspective, manufacturing exporters in East Asia adopted ‘financial’ mercantilism – subsidising the cost of capital – during decades of high growth. They switched to hoarding large international reserves when growth faltered, making it harder to disentangle the monetary mercantilism from the precautionary response to the heritage of past financial mercantilism. Monetary mercantilism also lowers the cost of hoarding, but may be associated with negative externalities leading to competitive hoarding. From this viewpoint, this paper makes three observations on the East Asian reserve accumulation. First, the recent large hoarding of reserves in Japan and Korea occurred in the aftermath of the growth strategy that combined export promotion and credit subsidisation (financial mercantilism). Second, whether the ultimate motive is mercantilist or precautionary, the ongoing reserve hoarding in Asia contains an element of competitive hoarding, which is likely to have negative externalities among countries involved. Finally, China's hoarding of reserves partly reflects the precaution against the financial fragility that is likely to follow the slowing of economic growth.     

Trade Expansion of China and India: Threat or Opportunity?

By exploring the export performances and specialisation patterns of China and India, we assess their trade competitiveness and complementarity vis-à-vis each other as well as with the rest of the world. Our analysis indicates that (a) India faces tough competition from China in the third markets especially in clothing, textiles and leather products; (b) there is a moderate potential for expanding trade between the two countries; (c) China poses a challenge for the East Asian economies, the US, and most European countries especially in medium-technology industries; (d) India appears to be a competitor mainly for its neighbouring South Asian countries; (e) complementarity exists between the imports of China and India, and the exports of the US, some European states and East Asian countries, especially Japan, Korea, Malaysia, Singapore and Thailand, implying opportunities for trade expansion; and finally (f) the export structure of China is changing with the exports of skill-intensive and high-technology products increasing and those of labour-intensive products decreasing gradually. This suggests that challenges created by China in traditional labour-intensive products might reduce in the long run.     

Exchange Rate Pass‐through and Currency Invoicing: Implications for Monetary Integration in East Asia

Exporter's price‐setting behaviour and currency invoicing play a key role in the literature on the new open‐economy macroeconomics. This paper estimates exchange rate pass‐through coefficients for the exports of four ASEAN countries: Indonesia, Malaysia, the Philippines and Thailand. In addition, previous estimates of pass‐through as well as invoicing behaviour in East Asia are discussed in the context of regional integration. The new pass‐through coefficients are estimated under two alternate specifications for up to 34 goods for each of the four ASEAN countries destined for up to 13 major markets. The results suggest: (a) little pass‐through is occurring in Southeast Asia and (b) this lack of pass‐through is more likely attributable to the fact that they are small countries in a relatively integrated market, rather than evidence of pricing to market. The implications for regional monetary integration of this apparently low degree of pass‐through are detailed.     

One Market,One Money: Evidence from Canada–United States Economic Integration

In this paper, we focus on the evolution of the optimum currency area (OCA) properties between Canada and the United States. To this end, we specifically investigate the relationship between the intra‐industry trade dynamics of Canadian provinces with the United States and the increasing level of integration between the two countries from 1980 to 1998. Our findings lead us to support the view that integration (real and monetary) improves the conditions under which a monetary union can yield net gains in the long run for the integrating countries. We also find that exchange rate developments exert asymmetric effects on the Canadian provinces.     

Monetary autonomy in emerging market economies: The role of foreign reserves

This paper examines trends in monetary autonomy and their interactions with financial integration, currency regimes and foreign reserves for recent decades in emerging Asian and Latin American economies. Our main findings are the following: First, most emerging Asian economies have increased monetary autonomy mainly due to changes in currency regimes toward floating regimes, while emerging Latin American economies have shown mixed results on monetary autonomy. Second, in all sample economies, the accumulation of foreign reserves has contributed to retaining monetary autonomy, probably implying the role of foreign reserves as an anchor for monetary autonomy in emerging market economies.     

On the Adequacy of Monetary Arrangements in Sub‐Saharan Africa

We examine the economic rationale for monetary union(s) in Sub‐Saharan Africa through the use of cluster analysis on a sample of 17 countries. The variables used stem from the theory of optimum currency areas and from the fear‐of‐floating literature. It is found that the existing CFA franc zone cannot be viewed as an optimum currency area: CEMAC and UEMOA countries do not belong to the same clusters, and a ‘core’ of the UEMOA can be defined on economic grounds. The results support the inclusion of the Gambia, Ghana and Sierra Leone in an extended UEMOA arrangement, or the creation of a separate monetary union with the ‘core’ of the UEMOA and the Gambia, rather than the creation of a monetary union around Nigeria. Finally, the creation of the West African Monetary Zone (WAMZ) around Nigeria is not supported by the data.     

Exchange Rate Volatility and Exports: New Empirical Evidence from the Emerging East Asian Economies

This paper examines the impact of bilateral real exchange rate volatility on real exports of five emerging East Asian countries among themselves as well as to 13 industrialised countries. We recognise the specificity of the exports between the emerging East Asian and industrialised countries and employ a generalised gravity model. In the empirical analysis we use a panel comprising 25 years of quarterly data and perform unit‐root and cointegration tests to verify the long‐run relationship among the variables. The results provide strong evidence that exchange rate volatility has a negative impact on the exports of emerging East Asian countries. In addition, the results suggest that the pattern of bilateral exports is influenced by third‐country variables. An increase in the price competitiveness of other emerging East Asian countries has a negative impact on a country’s exports to a destination market, but the magnitude of the impact is relatively small. These results are robust across different estimation techniques and do not depend on the variable chosen to proxy exchange rate uncertainty. The results of the GMM‐IV estimation also confirm the negative impact of exchange rate volatility on exports and suggest that this negative relationship is not driven by simultaneous causality bias.     

The European Monetary Union

The final stage of the European Monetary Union (EMU) is approaching; the single currency goes into effect on January 1, 1999. The article discusses the far-reaching ramifications of the euro in the context of the international monetary system. Current challenges facing the implementation of the new currency are addressed such as unemployment, high budget deficits, and general skepticism both EU members and non-members have expressed. The argument is made that acceptance and widespread use of the single currency will provide a framework for a deeper economic and political integration across Europe. © 1998 John Wiley & Sons, Inc.