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External Adjustments and Coordinated Exchange Rate Policy in Asia

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Eiji Ogawa
Kentaro Iwatsubo

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Abstract

In this paper, we estimate structural VAR models with contemporaneous restrictions based on neo-classical and Keynesian theories to investigate whether the cause of current account surpluses for East Asian economies is a gsaving gluth or undervalued currencies. Analytical results show that the major determinant of the current account is the real effective exchange rate for all East Asian countries with the exception of China for which the major determinant is domestic GDP. Accordingly, the recently requested revaluation of the Chinese yuan may not be an effective policy for reducing the Chinese current account surplus, and may affect other Asian current accounts. We also investigate whether a Chinese currency revaluation would contribute to the improvement of current account imbalances in East Asia and find that a revaluation would improve the current accounts of Japan, Korea, Indonesia, and Thailand. Since the trade structures of major East Asian countries are substitutes with that of China, a Chinese currency revaluation might not lead to a decrease, rather that an increase, in East Asian current account surpluses. Coordination of currency policy among East Asian countries is, therefore, needed to solve the global current account imbalance.

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Paper provided by Institute of Economic Research, Hitotsubashi University in its series Global COE Hi-Stat Discussion Paper Series with number gd08-048.

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Date of creation: Mar 2009
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Handle: RePEc:hst:ghsdps:gd08-048

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Alan M. Taylor & Mark P. Taylor, 2004. "The Purchasing Power Parity Debate," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 135-158, Fall. [Downloadable!] (restricted)
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  2. Dale W. Jorgenson & Koji Nomura, 2005. "The Industry Origins of Japanese Economic Growth," NBER Working Papers 11800, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. David Weinstein & Christian Broda, 2008. "Exporting deflation? Chinese exports and Japanese prices," Working Paper Series 2008-29, Federal Reserve Bank of San Francisco. [Downloadable!]
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  4. Messina, Julian, 2006. "The role of product market regulations in the process of structural change," European Economic Review, Elsevier, vol. 50(7), pages 1863-1890, October. [Downloadable!] (restricted)
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  5. Jorgenson, Dale W. & Nomura, Koji, 2005. "The industry origins of Japanese economic growth," Journal of the Japanese and International Economies, Elsevier, vol. 19(4), pages 482-542, December. [Downloadable!] (restricted)
  6. Robert Dekle & Jonathan Eaton & Samuel Kortum, 2008. "Global Rebalancing with Gravity: Measuring the Burden of Adjustment," NBER Working Papers 13846, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier. [Downloadable!] (restricted)
  8. Robert Dekle, 2005. "Exchange Rate Exposure and Foreign Market Competition: Evidence from Japanese Firms," Journal of Business, University of Chicago Press, vol. 78(1), pages 281-300, January. [Downloadable!]
  9. Marcel P. Timmer & Mary O’Mahony & Bart van Ark, 2007. "EU KLEMS Growth and Productivity Accounts: An Overview," International Productivity Monitor, Centre for the Study of Living Standards, vol. 14, pages 71-85, Spring. [Downloadable!]
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  1. Korhonen, Iikka & Fidrmuc , Jarko, 2009. "The impact of the global financial crisis on business cycles in Asian emerging economies," BOFIT Discussion Papers 11/2009, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
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