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External Adjustments and Coordinated Exchange Rate Policy in Asia

  • Eiji Ogawa
  • Kentaro Iwatsubo

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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File URL: http://gcoe.ier.hit-u.ac.jp/research/discussion/2008/pdf/gd08-048.pdf
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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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  1. Ben Hunt & Alessandro Rebucci, 2003. "The U.S. Dollar and the Trade Deficit; What Accounts for the Late 1990's?," IMF Working Papers 03/194, International Monetary Fund.
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  8. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
  9. Menzie D. Chinn & Hiro Ito, 2008. "Global Current Account Imbalances: American Fiscal Policy versus East Asian Savings," Review of International Economics, Wiley Blackwell, vol. 16(3), pages 479-498, 08.
  10. Catherine L. Mann, 2002. "Perspectives on the U.S. Current Account Deficit and Sustainability," Journal of Economic Perspectives, American Economic Association, vol. 16(3), pages 131-152, Summer.
  11. Kyungho Jang & Masao Ogaki, 2001. "The Effects of Monetary Policy Shocks on Exchange Rates: A Structural Vector Error Correction Model Approach," Working Papers 01-02, Ohio State University, Department of Economics.
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  13. 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).
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