Is the Renminbi East Asia’s Dominant Reference Currency? A Reconsideration

• Main Author: CHOW, Hwee Kwan
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2013
• Subjects: Currency baskets; Renminbi; US dollar; Vector Autoregressions; East Asia; China; Asian Studies; Finance
• Online Access: https://ink.library.smu.edu.sg/soe_research/1525; https://ink.library.smu.edu.sg/context/soe_research/article/2524/viewcontent/Chow_HweeKwan.PDF
• Institution: Singapore Management University

Recent empirical studies show that the Chinese currency renminbi is either becoming or has become a dominant reference currency in East Asia. This paper reviews the evidence with daily exchange rate data from seven East Asian economies namely, Indonesia, Korea, Malaysia, the Philippines, Singapore, Thailand and Taiwan. We consider the likely problems and pitfalls associated with the application of Frankel-Wei regressions to determine the weights of the US dollar and the renminbi in the implicit currency baskets. We show empirically the estimation of currency weights using non-orthogonalised renminbi movements could suffer from imprecision and/or inconsistency. To circumvent the simultaneity bias problem present in most of these regressions, we use country-specific VAR models to take into explicit account the mutual interaction of the exchange rates variables. Impulse response analysis reveals that the US dollar still retains its dominant regional influence but the role of the renminbi in East Asian exchange rate determination has increased after the global financial crisis.