Is there a Yuan Bloc in East Asia?

• Main Author: CHOW-TAN, Hwee Kwan
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2011
• Subjects: Economic Theory; Growth and Development
• Online Access: https://ink.library.smu.edu.sg/soe_research/1958
• Institution: Singapore Management University

Which regional currency or currencies do the East Asian central banks pay more attention to when deliberating on exchange rate policy decisions? Recent empirical evidence show, by applying Frankel-Wei regressions to daily exchange rates series, that the region is well on its way in becoming a yuan bloc (see inter alia Ito (2010) and Chen et al. (2009)). This study reviews the evidence with the use of weekly data from seven East Asian economies— namely, Indonesia, Korea, Malaysia, the Philippines, Singapore, Thailand and Taiwan—in order to characterize exchange rate policy in the region beyond the very short term. Additionally, we construct a regional composite index (RCI) of each country by using trade weights of their top five regional trading partners. However, as confirmed by Hausman specification tests, the movements in the RCI (that are independent of the US dollar variations) are themselves influenced by fluctuations in the Asian currencies. The endogeneity of RCI rules out the direct application of the augmented Frankel-Wei regression. To circumvent the simultaneity bias problem, we use country-specific VAR models to compare the relative impact which fluctuations in the RCI, renminbi and yen separately have on movements of Asian currencies. We can assess the relative influence of their innovations by deriving the impulse response functions that trace dynamic effects of innovations in foreign currencies on the domestic currency. We ascertained that the weekly exchange rates variations in some Asian countries are influenced by the cumulative effect of currencies of their key regional trading partners while most currencies exhibit some co-movement with the renminbi. Overall, the US dollar continues to play an important role to exchange rate management in the region within the sample period.Is there a Yuan Bloc in East Asia?. Available from: https://www.researchgate.net/publication/266038681_Is_there_a_Yuan_Bloc_in_East_Asia [accessed Apr 20, 2017].