A De Facto Asian-Currency Unit Bloc in East Asia: It has Been There but We did not Look for It

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Asian Development Bank InstituteThe Working Paper series is a continuation of the formerly named Discussion Paper series; the numbering of the papers continued without interruption or change. ADBI's working papers reflect initial ideas on a topic and are posted online for discussion. ADBI encourages readers to post their comments on the main page for each working paper (given in the citation below). Some working papers may develop into other forms of publication. AbstractPegging in a coordinated way to a regional basket currency is considered by many as optimal for east-Asian countries. By contrast, according to existing empirical studies, these countries have most often relied on noncooperative United States dollar or G3 pegs. We show for the first time that by the late 1990s, with some reversals, a majority of east-Asian countries had already moved, de facto, away from the dollar peg and started targeting a basket, including east-Asian currencies (an "Asian Currency Unit"). Common-shock or market-based interpretations of such moves are ruled out since we document that, with few exceptions, countries in the region have in reality stuck to fixed exchange rates. We obtain such results using a Markov-switching estimation benchmarked against Bai-Perron structural break tests for the synthesis model of Frankel and Wei (2007), which augments the inference about currency weights in a basket with the weight on exchange-market pressure. In order to measure the latter, the forward positions of central banks in the foreign exchange market are taken into account. JEL Classification: F31, F41

Exchange rate linkages between the ASEAN currencies, the US dollar and the Chinese RMB

“…A similar conclusion was reached by Hernandez and Montiel (2003) by employing the relative volatilities of exchange market pressure indices. 3 On the other hand, Girardin (2011) employed an approach combining two methods (as in Frankel and Wei, 2008) and Choy, 2007;Sun andSimons, 2011, Ogawa andKawasaki, 2008;Mishra and Sharma, 2010).…”

“…4 In the present paper we consider the PPP-based real exchange rate of the ASEAN currencies vis-a-vis not only the US dollar but also the Chinese RMB to examine whether and to what extent they are now following the latter rather than the former. In addition, we are also interested in establishing whether they are linked instead to an ASEAN regional currency unit, since the issue of a regional currency in Asia has been widely discussed recently; for instance Girardin (2011) found evidence for basket pegs in Asia with a predominant role for an Asian Currency Unit.…”

How Useful Is an Asian Currency Unit (ACU) Index for Surveillance in East Asia?

“…Its use in the immediate term as a surveillance indicator can be for the purpose of serving as an early warning signal for excessive inflows of capital as well as their sudden reversal, and for assessing whether regional currencies are over or undervalued relative to the regional average or ACU benchmark. This argument of using an ACU index as the lynchpin of exchange rate and monetary cooperation is supported by a recent finding of Girardin (2011) that East Asian countries have started targeting a regional monetary unit by stealth and, accordingly, that it may be better for all of these countries to start doing this in a more coordinated fashion.…”

“…Some of the notable findings in this vast literature, including the soft-US dollar peg adopted by most countries in East Asia prior to the 1997-98 Asian financial crisis and the alleged reversion to a relatively similar US dollar peg in the aftermath of the Asian financial crisis, have been regarded by other related studies as the failure of economies in the region to appropriately coordinate their exchange rate policies (Girardin 2011;Ogawa and Ito 2002;Ohno 1999). The implication of this so-called coordination failure is that a unilateral decision by one country to achieve stability vis-à-vis another currency may not be the optimal option for all countries in the region.…”

The Renminbi Bloc is Here: Asia Down, Rest of the World to Go?1)

“…He also argues for regional cooperation: "strategic regional cooperation could facilitate, and mitigate obstacles to, RMB internationalization" and the creation of an Asian Currency Unit. More technically, Girardin (2011) argues that Asian currencies have been targeting a synthetic composite exchange rate of various Asian currencies rather than a given dominant currency.…”