Three measures of East Asian currency evaluation

One of the prominent explanations for the East Asian financial crises of 1997 relies upon East Asian currency overvaluation. However, most empirical studies of these crises do not undertake serious examination of whether these currencies were overvalued. In this article, three major approaches to identifying the equilibrium exchange rate are implemented: long-run purchasing power parity (PPP), a productivity-based model, and a monetary model of the nominal exchange rate. The PPP calculations indicate that as of May 1997, the Hong Kong dollar, baht, ringgit, and peso were overvalued, and the won undervalued. In a framework that explicitly accounts for the role of productivity, substantial overvaluation of the peso is detected, but an undervaluation of the won is also uncovered. Misalignments of the ringgit and baht are small. Finally, the estimated equilibrium rates from a monetary model do not imply much deviation from short-run equilibrium at the end of June 1997. A conclusion of substantial overvaluation on the eve of the East Asian currency turmoil is not very plausible, suggesting that some alternate mechanism for generating crises - other than one involving the conventional macroeconomic fundamentals - was at work.