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How do the Renminbi and other East Asian currencies co-move?

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  • Keddad, Benjamin

Abstract

This paper investigates the degree and the nature of exchange rate co-movements between the Renminbi and a set of seven East Asian currencies by estimating Markov switching models with regime-dependent correlations and time-varying transition probabilities. These models have several advantages. First, exchange rate co-movements can vary across different depreciation and appreciation regimes. Second, the Renminbi can act as a transition variable that provides information regarding how the exchange rates evolve over time. After controlling for global effects and exchange market pressures, the results yield robust evidence of the Renminbi's rising role in East Asia as a significant factor in currency fluctuations. A key result is that regional currencies tend to overreact when the Renminbi depreciates and underreact when it appreciates, suggesting that East Asian economies are not willing to allow their currencies to substantially appreciate against the Chinese currency. Finally, trade transactions and competition as well as financial flows demonstrate significant explanatory power regarding currency movements against the Renminbi -- particularly during episodes of smaller exchange rate fluctuations.

Suggested Citation

  • Keddad, Benjamin, 2016. "How do the Renminbi and other East Asian currencies co-move?," MPRA Paper 83782, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:83782
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    5. He, Qing & Liu, Junyi & Yu, Jishuang, 2023. "Dancing with dragon: The RMB and developing economies’ currencies," Research in International Business and Finance, Elsevier, vol. 64(C).
    6. Ping Wang & Peijie Wang, 2022. "Assessment on estimations of currency basket weights—With coefficient correction for common factor dominance," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1401-1418, January.
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    8. Kinkyo, Takuji, 2020. "Growing influences of the Chinese renminbi on Asian exchange rates: Evidence from a wavelet analysis of dynamic spillovers," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    9. Kinkyo, Takuji, 2022. "The intermediating role of the Chinese renminbi in Asian currency markets: Evidence from partial wavelet coherence," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    10. Liu, Tao & Wang, Xiaosong & Woo, Wing Thye, 2022. "The rise of Renminbi in Asia: Evidence from Network Analysis and SWIFT dataset," Journal of Asian Economics, Elsevier, vol. 78(C).
    11. Shekhar Hari Kumar & Vimal Balasubramaniam & Ila Patnaik & Ajay Shah, 2020. "Who cares about the Renminbi?," 2020 Papers pha1373, Job Market Papers.
    12. Peijie Wang & Ping Wang, 2024. "Emerging influence of the RMB on currency markets in a transpiring tri‐polar international monetary system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 443-464, January.
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    15. Kinkyo, Takuji, 2020. "Time-frequency dynamics of exchange rates in East Asia," Research in International Business and Finance, Elsevier, vol. 52(C).

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    More about this item

    Keywords

    Exchange Rates ; East Asia ; Renminbi Impact ; Markov Switching Models ; Asymmetric Co-movements ; Time-Varying Transition Probabilities;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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