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Managing Exchange Rate Volatility: A Comparative Counterfactual Analysis of Singapore 1994 to 2003

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Author Info
Peter Wilson (Department of Economics, National University of Singapore 1 Arts Link, Singapore)
Henry Ng Shang Ren
Abstract

The objective of this paper is see how well Singapore’s exchange rate regime has coped with exchange rate volatility before and after the Asian financial crisis by comparing the performance of Singapore’s actual regime in minimising the volatility of the nominal effective exchange rate (NEER) and the bilateral rate against the US$ against some counterfactual regimes and the corresponding performance of eight other East Asian countries. In contrast to previous counterfactual exercises, such as Williamson (1998a) and Ohno (1999) which compute the weights for effective exchange rates on the basis of simple bloc aggregates, we apply a more disaggregated methodology using a larger number of trade partners. We also utilize ARCH/GARCH techniques to obtain estimates of heteroskedastic variances to better capture the time-varying characteristics of volatility for the actual and simulated exchange rate regimes. Our findings confirm that Singapore’s managed floating exchange rate system has delivered relatively low currency volatility. Although there are gains in volatility reduction for all countries in the sample from the adoption of either a unilateral or common basket peg, particularly post-crisis, these gains are relatively low for Singapore, largely because low actual volatility. Finally, there are additional gains for nondollar peggers from stabilizing intra-EA exchange rates against the dollar if they were to adopt a basket peg, especially post-crisis, but the gains for Singapore are again relatively modest.

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Paper provided by National University of Singapore, Department of Economics, SCAPE in its series SCAPE Policy Research Working Paper Series with number 0608.

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Length: 41 pages
Date of creation: Feb 2006
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Handle: RePEc:sca:scaewp:0608

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Related research
Keywords: East Asia; exchange rates; counterfactuals.;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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    Other versions:
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  16. Bayoumi, Tamim & Eichengreen, Barry, 1998. "Exchange rate volatility and intervention: implications of the theory of optimum currency areas," Journal of International Economics, Elsevier, vol. 45(2), pages 191-209, August. [Downloadable!] (restricted)
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  17. Kang, Sammo & Kim, Soyoung & Wang, Yunjong & Yoon, Deok Ryong, 2003. "Exchange Rate and Output Dynamics Between Japan and Korea," Discussion Paper Series 26297, Hamburg Institute of International Economics. [Downloadable!]
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