A theory of international currency: Competition and discipline

We explicitly consider strategic interaction between governments to study currency competition and its effects on the circulation of currencies and welfare in a two-country two-currency search-theoretic model. Each government finances public goods by means of seigniorage. Compared with a regime with two local currencies, a regime with one international currency allows the issuer of the international currency to reduce the inflation tax while collecting more seigniorage, and forces the other issuer to raise the rate to compensate for a diminished tax base. However, the country with a local currency is sometimes constrained by an inflation discipline: the more open a country is, the stronger is the discipline. Strategic selection of equilibrium gives rise to a further inflation discipline: the larger country tries to have its currency circulate abroad, while the smaller country tries to prevent the circulation of Foreign currency.     

Nonstationarity of Real Exchange Rates in the G7 Countries: Are They Cointegrated with Real Variables?

Using monthly data for the G7 countries in the post-Bretton Woods floating rate period, this paper demonstrates that almost all bilateral real exchange rates have unit roots and, hence, are nonstationary. Consequently, it rejects simple PPP as a long-run relationship. The paper also shows that many of these real exchange rates are cointegrated with other real economic variables such as relative labor productivity, terms-of-trade ratios, real trade balance ratios, and long-term real interest rate differentials. In particular, relative labor productivity is statistically significant with the correct sign for more than half of the country pairs for which cointegration is confirmed. This finding lends support to the Balassa–Samuelson productivity-bias hypothesis. These results imply that nonstationarity of real exchange rates and the consequent rejection of simple PPP can be consistent with the notion that real exchange rates revert to an equilibrium in the long run without deviating arbitrarily far from this equilibrium position.J. Japan. Int. Econ.,December 1997, pp. 523–547. Institute of Social Science, University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113, Japan, and Faculty of Business and Commerce, Meiji University, 1-1 Kanda, Surugadai, Chiyada-ku, Tokyo 101, Japan.     

国际贸易中计价货币选择的决定因素研究——基于微观视角的局部均衡分析

在既有的基于微观视角的包含两币的局部均衡模型中引入交易货币,发现国际贸易中计价货币选择的决定因素依次为:卖方市场结构、出口品差异化程度、出口国所占目标市场份额、其他出口商的计价策略和汇率的稳定性.在同质性商品的国际贸易中,计价货币的非同质性会导致货币垄断计价.其中,进口方货币的垄断计价地位较为稳定,出口方货币垄断计价情...     

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.     

The Role of Nominal Anchor Currencies in Exchange Rate Arrangements

This paper studies the evolution of exchange rate arrangements of almost all countries in the world over the period 1970–1996. It examines both officially reported and empirically observed exchange rate arrangements. Several findings are obtained. First, the relative economic size of countries under fixed exchange rate regimes has not declined as dramatically as the measure based on reported arrangements would indicate. Second, the U.S. dollar has been the most dominant, global anchor currency because many developing economies, particularly those in Asia, Latin America, and the Middle East, have attempted to stabilize their exchange rates to the dollar. Third, the reserve currency composition is determined by the constructed measure of the net currency-area size in addition to the own-economic size of the reserve currency country. Fourth, as a result of the transition to the final stage of EMU, the euro is expected to emerge as the world's second most dominant anchor currency. While the Japanese yen will continue to play a less significant role as nominal anchor, its role in East Asia is expected to rise gradually.J. Japan. Int. Econ.December 1998,12(4), pp. 334–387. World Bank, 1818 H Street, N.W., Washington, DC 20433 and Institute of Social Science, University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113, Japan.Copyright 1998 Academic Press.Journal of Economic LiteratureClassification Numbers F31, F33, F36.     

On the Role of Monetary Policy in a Deflationary Economy: The Case of Japan

In this paper we review the role of monetary policy for a country facing deflationary pressure based on the recent experience of the Japanese economy. We discuss economic background of inflation policy in Japan and analyze the impacts of the policy. We made simple calculations regarding how much the debt of selected companies and government can be reduced by mild inflation. Noting that the Fisher effect does not work perfectly under liquidity traps, the effect of inflation on debt issue appears quite large. To maintain controllable stable inflation, inflation targeting is a good candidate for the policy rule. J. Japan. Int. Econ., December 2000, 14(4), pp. 238–260. Graduate School of Economics, University of Tokyo, 7-3-1 Hongo, Bukyo-ku, Tokyo 113-0033, Japan Copyright 2000 Academic Press.Journal of Economic Literature Classification Numbers: E31, E52, E58.     

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.     

Exchange Rate Behavior of Canada,Japan, the United Kingdom and the United States

We revisit a significant research topic on exchange rate behavior by restating the test procedures with an appropriate econometric methodology to re-examine three aspects. (i) Does the inflation (price) factor affect nominal exchange rate? (ii) Do relative interest rates affect a country’s exchange rate? (iii) Do the price and interest rate effects hold if controls for non-parity factors are embedded in tests? The quarterly data series for this study are taken over 55 years. The traditional parity condition model with price and interest rate as criterion variables is extended to take into account recently-verified non-parity factors, namely trade, productivity and foreign reserves. The results affirm that both parity factors and also the non-parity factors significantly affect the exchange rates of Canada, Japan, the United Kingdom and the United States. In our view, these findings relating to four free-floating currencies help extend our knowledge on how currency behavior is consistent with parity and non-parity theorems using a relevant methodological approach in this study.     

Currency Networks, Bilateral Exchange Rate Volatility and the Role of the US Dollar

We investigate monthly bilateral exchange rate volatility for a large sample of currency pairs over the period 1999?C2006. Pegs (particularly to the US dollar) and managed floats tend to have lower volatility than independent floats. A deeper investigation shows that the peg effect operates almost entirely through currency networks (i.e. where two currencies are pegged to the same anchor currency), and the lower volatility of US dollar pegs reflects the size of the US dollar network. Managed floats show clear evidence of tracking the US dollar, further increasing the effective size of the US dollar network. Inflation undermines the currency-stabilizing effect of peg networks. Currencies in smaller peg networks have higher unweighted but not trade-weighted exchange rate volatility, which is consistent with anchors being chosen to minimize trade-weighted volatility. The size of the effective US dollar network revealed here is a plausible explanation of the rarity of basket pegs. Volatility also reflects a range of structural factors such as country size, level of development, population density, inflation differentials and business cycle asymmetry.     

International Price Linkage within a Region: The Case of East Asia

This paper investigates how “prices” in East Asian economies correlate with those in Japan and the United States. The analysis is particularly noteworthy because although the East Asian economies are geographically close to Japan, their currencies have been tied more closely to the U.S. dollar. In this paper, we analyze two different types of “prices”: overall price levels in terms of the same currency and relative prices among different commodities. We demonstrate that overall price levels in the East Asian economies are more closely related to those in the United States. However, the relative prices in East Asia, especially those in Taiwan and Korea, are more closely correlated with those in Japan. These price correlation patterns are in marked contrast with those in other regions.J. Japan. Int. Econ.December 1993,11(4), pp. 643–666. Faculty of Economics, The University of Tokyo, Tokyo, Japan; and Department of Economics, The University of British Columbia, Vancouver, Canada, and Graduate School of Economics, Hitotsubashi University, Japan.     

How Did the Dollar Peg Fail in Asia?

In this paper, we have constructed a theoretical model in which the Asian firm maximizes its profit, competing with the Japanese and the U.S. firms in their markets. The duopoly model is used to determine export prices and volumes in response to the exchange rate fluctuations vis-à-vis the Japanese yen and the U.S. dollar. Then, the optimal basket weight that would minimize the fluctuation of the growth rate of trade balance was derived. These are the novel features of our model. The export price equation and export volume equation are estimated for several Asian countries for the sample period from 1981 to 1996. Results are generally reasonable. The optimal currency weights for the yen and the U.S. dollar are derived and compared with actual weights that had been adopted before the currency crisis of 1997. For all countries in the sample, it is shown that the optimal weight of the yen is significantly higher than the actual weight.J. Japan. Int. Econ.,Dec. 1998,12(4), pp. 256–304. Institute of Economic Research, Hitotsubashi University, Kunitachi, Tokyo 186, Japan; Department of Commerce, Hitotsubashi University, Kunitachi, Tokyo 186, Japan; Department of Commerce, Takachiho University, Suginami, Tokyo 168, Japan.Copyright 1998 Academic Press.Journal of Economic LiteratureClassification Numbers F31, F33, O11.     

Stabilization of effective exchange rates under common currency basket systems

We investigate the extent to which a common currency basket peg would stabilize effective exchange rates of East Asian currencies. We use an AMU (Asian Monetary Unit), which is a weighted average of ASEAN10 plus 3 (Japan, China, and Korea) currencies, as a common currency basket to investigate the stabilization effects. We compare our results with another result on stabilization effects of the common G3 currency (the US dollar, the Japanese yen, and the euro) basket in the East Asian countries [Williamson, J., 2005, A currency basket for East Asia, not just China. In: Policy Briefs in International Economics, No. PB05-1. Institute for International Economics]. We obtained the following results: first, the AMU peg system would be more effective in reducing fluctuations of the effective exchange rates of East Asian currencies as a number of countries applied the AMU peg system increases in East Asia. Second, the AMU peg system would more effectively stabilize the effective exchange rates than a common G3 currency basket peg system for four (Indonesia, the Philippines, South Korea, and Thailand) of the seven countries. The results suggest that the AMU peg system would be useful for the East Asian countries whose trade weights on Japan are relatively higher than others. J. Japanese Int. Economies 20 (4) (2006) 590–611.     

Currency Misalignments in the BRIICS Countries: Fixed Vs. Floating Exchange Rates

In the present paper we attempt to investigate whether the real effective exchange rates of the BRIICS countries, namely Brazil, Russia, India, Indonesia, China and South Africa, converge or not to their equilibrium levels. Our analysis is based on the use of an external balance model as well as the implementation of recent panel cointegration techniques. Our evidence indicates the existence of a valid long-run relationship between the real effective exchange rate, the net foreign assets, the GDP differential and the real interest rate differential for each of the six countries of our sample. Furthermore, our empirical results imply that after the adoption of a free floating exchange rate regime by Brazil, Russia, India, Indonesia and South Africa and the liberalisation of the Chinese exchange rate policy that took place during the last decade, currency misalignments have been gradually reduced, leading the real effective exchange rates of the respective currencies very close to their equilibrium levels.     

Asian Currency Crisis and the Generalized PPP: Evidence from the Far East

The present paper investigates the effects of the Asian currency crisis of 1997–1998 on the generalized PPP between several real exchange rates of the Far East countries. Monthly log of real exchange rates of the currencies of Thailand, Malaysia, Indonesia, the Philippines and South Korea vis-à-vis the US dollar and the Japanese yen during 1990–2004 are applied in the investigation. Further tests are conducted between exchange rates vis-à-vis the Thai baht. Tests are conducted for periods before and after the crisis. Results from the Johansen method of multivariate cointegration show a substantial change in the relationship between these real exchange rates before and after the Asian currency crisis. This result is found using rates based on three currencies: US dollar, yen and baht.     

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 the pacific: an evaluation of currency basket regimes

The Pacific island countries have opted for exchange rate regimes with varying degrees of flexibility. Whereas several microstates have adopted an external currency as their legal tender, others have decided to use a basket currency, and yet others have chosen a managed float. The choice of exchange rate regime can have far reaching economic consequences. In the paper, we study the basket currency arrangements by Fiji, Samoa, the Solomon Islands, and Tonga. We first build a new four‐country exchange rate model that illustrates how monetary authorities should best determine the weights of the basket currencies given certain macroeconomic objective functions. In this model, we explicitly include tourism flows. In the second part of the paper, we estimate the de facto weights of foreign currencies in the currency basket of the four countries. We show how the composition has changed amid the global financial crisis. Finally, we demonstrate that the current weights are not optimal compared with the predictions of our model.     

A tale of Asian exchange rate management: Romance of the three currencies

Asian currencies lack regional policy coordination and are therefore subject to volatilities such as the Asian currency crisis of 1997/99. As the Asian currencies have already been observed to be ‘flying-in-unison’, a stable exchange rate arrangement can be helpful as the next step of evolution for regional financial stability. We consider that creating a cluster effect from coordinated efforts/policies of policy-makers can lead to regional exchange rate stability. To demonstrate this cluster effect, a three-party-game is computed for an Asian bloc, viz-á-viz US dollar and the Euro, based on a Nash and a cooperative equilibrium. The cluster effect would generate external and internal pressures that work towards the formation of a regional currency, although the exact form of exchange rate regime would have to await political consensus. There are substantial welfare gains within Asia network economy through currency cooperation. The formation of an Asian currency bloc would also create counter-balance to the current dominance of the US dollar and the Euro. Like the epic story of Three Kingdoms who sought hegemony in Chinese history, the Asian currency bloc will contend with many possible outcomes of competition as well as cooperation.     

An endeavor to estimate seigniorage before the end of and immediately after the Pacific War

This is the first research paper to analyze seigniorage in Japan before, during, and after the Pacific War. As a result of logically categorizing various definitions of seigniorage (opportunity cost approach, monetary approach, and inflation tax), we conclude that these differences pivot on the issue of whether to confine the scope of debts, which is reduced by unexpected inflation, to the usual general government debt or to expand it to the integrated government debt including the monetary base of the Bank of Japan. We also point out the possibility that, in light of the degree of reduction in government debt as a percentage of GDP during and after the Pacific War, the monetary approach or inflation tax (the cases of confining the taxation base to the usual general government debt) are appropriate means to estimate seigniorage obtained by the general government.     

Fixed Exchange Rates and Disinflation in Emerging Markets: How Large Is the Effect?

We examine developing countries which have institutional quality ratings for the effects of exchange rate rigidity on inflation. The level of institutional development exerts no effect on the impact of currency regimes. However, the interaction of institutional quality and exchange rates has, in the most plausible specifications, a negative impact on inflation. This suggests that fixed exchange rates exert at most a contingent effect on inflation, and indicates that countries in Eastern Europe and Latin America contemplating currency pegs would be better off improving institutional quality prior to adopting the euro or dollar and expecting a large subsequent disinflationary effect. JEL no.  F31, O11