Towards an Expanded Role for Asian Currencies: Issues and Prospects
AbstractNotwithstanding incumbency advantages and network effects enjoyed by the United States (US) dollar, considerations about the stability of its value have led Asian countries to fear they are holding their foreign exchange reserves in a depreciating currency. At the same time, it pays for the regional countries to adjust their reserve currency composition to match the point of reference of their exchange rate policy. This paper examines empirically which regional currency or currencies seem to matter for exchange rate determination in Asia beyond the very short term. To this end, we employ country-specific Vector Autoregressive (VAR) models to compare the relative impact which fluctuations in the Asian Currency Unit (ACU), yuan and yen separately have on movements of Asian currencies. Contrary to recent evidence based on daily data, we found monthly exchange rates variations in the region are more heavily influenced by the cumulative effect of key Asian currencies than by the yuan or the yen individually within the sample period we used. To the extent that exchange rates in the region shift over time from benchmarking the US dollar towards a broad range of Asian currencies, Asian central banks will find it more attractive to cross-hold Asian bonds. This calls for the development of deep private markets in such assets, as well as institutional prerequisites for internationalizing key regional currencies.
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Bibliographic InfoPaper provided by Asian Development Bank Institute in its series ADBI Working Papers with number 285.
Length: 28 pages
Date of creation: 27 May 2011
Date of revision:
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asian currency unit; asian currencies; foreign exchange reserves; exchange rate policy; asian central banks;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-06-04 (All new papers)
- NEP-CWA-2011-06-04 (Central & Western Asia)
- NEP-IFN-2011-06-04 (International Finance)
- NEP-MON-2011-06-04 (Monetary Economics)
- NEP-SEA-2011-06-04 (South East Asia)
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