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The AMU Deviation Indicators Based on the Purchasing Power Parity and Adjusted by the Balassa-Samuelson Effect

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  • OGAWA Eiji
  • Zhiqian WANG
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    Abstract

    This paper investigates how the Asian Monetary Unit (AMU) Deviation Indicators for surveillance measurements among East Asian currencies are improved by changing their benchmark rates from the constant rates in 2000-2001 to time-varying rates based on their purchasing power parities (PPPs). The consumer price indexes (CPIs) are used to calculate their PPPs as a time-varying benchmark for the AMU Deviation Indicators. Because the CPIs include prices of non-tradable goods, the PPPs based on the CPIs have a problem related with the Balassa-Samuelson effect. For this reason, the PPPs adjusted by the Balassa-Samuelson effect should be used to calculate when the CPIs are used as price data. This paper compares the PPP-based AMU Deviation Indicator with the PPP-based AMU Deviation Indicator adjusted by the Balassa-Samuelson effect. We conclude that both indicators are also useful in making surveillance of overvaluation or undervaluation of the intra-regional exchange rates of East Asian currencies.

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    Bibliographic Info

    Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 12078.

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    Length: 45 pages
    Date of creation: Dec 2012
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    Handle: RePEc:eti:dpaper:12078

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    1. Eiji Ogawa & Michiru Sakane, 2006. "Chinese Yuan after Chinese Exchange Rate System Reform," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 14(6), pages 39-57.
    2. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
    3. Eiji Ogawa & Michiru Sakane, 2006. "The Chinese Yuan after the Chinese Exchange Rate System Reform," Discussion papers 06019, Research Institute of Economy, Trade and Industry (RIETI).
    4. Balassa, Bela, 1973. "Just How Misleading are Official Exchange Rate Conversions?: Comment," Economic Journal, Royal Economic Society, vol. 83(332), pages 1258-67, December.
    5. Krugman, Paul R., 1978. "Purchasing power parity and exchange rates : Another look at the evidence," Journal of International Economics, Elsevier, vol. 8(3), pages 397-407, August.
    6. Yoshikawa, Hiroshi, 1990. "On the Equilibrium Yen-Dollar Rate," American Economic Review, American Economic Association, vol. 80(3), pages 576-83, June.
    7. Ogawa, Eiji & Shimizu, Junko, 2006. "Stabilization of effective exchange rates under common currency basket systems," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 590-611, December.
    8. Eiji Ogawa & Junko Shimizu, 2006. "Stabilization of Effective Exchange Rates Under Common Currency Basket Systems," NBER Working Papers 12198, National Bureau of Economic Research, Inc.
    9. Masahiro Kawai & Shinji Takagi, 2005. "Towards regional monetary cooperation in East Asia: lessons from other parts of the world," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(2), pages 97-116.
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