Asian Currency Unit (ACU), deviation indicators and exchange rate coordination in East Asia: A panel-based convergence approach

Abstract

Employing the panel convergence method of Phillips-Sul (2007) to the nominal deviation indicators of two recent unofficial constructions of an Asian Currency Unit (ACU) index, this paper examines the existence and extent of convergence in the movements of East Asian currencies against the ACU. Empirical results reveal that intra-East Asian exchange rate movements have not converged to form one, cohesive and unified bloc where currencies share homogenous movements, regardless of whether one examines the data on intra-East Asian exchange rate movements before or after the collapse of Lehman Brothers in September 2008. Instead, a separate number of convergent clubs or blocs in the region have formed in recent years. Finally, and most importantly, we observe at the end of the period of our examination that economies in the region are, generally, converging at different speeds to two opposing poles of convergence, that is, groups of relatively depreciating currencies and, on the other, groups of relatively appreciating currencies. JEL: F31, F36, C33

Banking and Finance Issues in Emerging Markets

“…Similar to Lopez and Papell (2007), Lopez (2008), Engel (2000Engel ( , 2014, and West (2005, 2006), with longer time period, and hence increased power of the tests, results of panel unit root tests, and panel cointegration tests of this study confirm the validity of both absolute PPP and relative PPP among ASEAN-5 countries. Additionally, the findings are conceptually in line with Lau et al (2012), Matsuki and Sugimoto (2013), Sarno and Schmeling (2014), Pontines and You (2015), Kar (2018), and Soon, Baharumshah, and Wohar (2018). However, the panel cointegration test results do not provide strong evidence support PPP because of low significant level of the panel cointegration test of nominal effective exchange rate and inflation ratio.…”

“…By adding more observations using more time series with additional cross-sectional (in term of currencies) dimensions as panel data, panel unit root tests, and panel cointegration tests have been claimed as superior and more appropriated tests with optimum. Panel time series properties tests have been performed to validate the existence of PPP among countries within the region and continent (Atjimakul, 2008;Lau et al, 2012;Matsuki & Sugimoto, 2013;Pontines & You, 2015;Reunrojrung, 2008;Wu, 1996). However, based on properties of high frequency time series, it is possible that the series can be time-varying volatility.…”

“…For the past two decades, panel unit root tests had been claimed as the better tests of PPP because of its high power of the test based on larger size of data set (Hooy, Law, & Chan, 2015;Lau, Suvankulov, Su, & Chau, 2012;Matsuki & Sugimoto, 2013;Pontines & You, 2015;and Wu, 1996). The purposes of this chapter intend (i) to test exchange rate integration among ASEAN-5 countries using panel data techniques and (ii) to determine impact of economic integration on the level of integration of the exchange rate among ASEAN-5 countries.…”