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A De Facto Asian-Currency Unit Bloc in East Asia : It Has Been There but We Did Not Look for It

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  • Eric Girardin

    (Asian Development Bank Institute (ADBI))

Abstract

Pegging 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 Unitâ€). 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.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 23275.

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Date of creation: Jan 2011
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Handle: RePEc:eab:macroe:23275

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Keywords: Asian-Currency Unit Bloc; East Asia; regional basket currency; Markov-switching estimation; foreign exchange market;

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References

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  1. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  2. Cheung, Yin-Wong & Erlandsson, Ulf G., 2005. "Exchange Rates and Markov Switching Dynamics," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 314-320, July.
  3. Masahiro Kawai, 2008. "Toward A Regional Exchange Rate Regime In East Asia," Pacific Economic Review, Wiley Blackwell, vol. 13(1), pages 83-103, 02.
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Cited by:
  1. Victor Pontines, 2013. "How Useful Is an Asian Currency Unit (ACU) Index for Surveillance in East Asia?," Finance Working Papers 23398, East Asian Bureau of Economic Research.
  2. Subramanian Arvind & Kessler Martin, 2013. "The Renminbi Bloc is Here: Asia Down, Rest of the World to Go?," Journal of Globalization and Development, De Gruyter, vol. 4(1), pages 49-94, August.
  3. C. Randall Henning, 2012. "Choice and Coercion in East Asian Exchange Rate Regimes," Working Paper Series WP12-15, Peterson Institute for International Economics.
  4. Balasubramaniam, Vimal & Patnaik, Ila & Shah, Ajay, 2011. "Who cares about the Chinese Yuan?," Working Papers 11/89, National Institute of Public Finance and Policy.

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