Towards an Expanded Role for Asian Currencies: Issues and Prospects

Notwithstanding incumbency advantages and network effects enjoyed by the United States (US) dollar, considerations about the stability of its value have led Asian countries to fear they are holding their foreign exchange reserves in a depreciating currency. At the same time, it pays for the regional countries to adjust their reserve currency composition to match the point of reference of their exchange rate policy. This paper examines empirically which regional currency or currencies seem to matter for exchange rate determination in Asia beyond the very short term. To this end, we employ country-specific Vector Autoregressive (VAR) models to compare the relative impact which fluctuations in the Asian Currency Unit (ACU), yuan and yen separately have on movements of Asian currencies. Contrary to recent evidence based on daily data, we found monthly exchange rates variations in the region are more heavily influenced by the cumulative effect of key Asian currencies than by the yuan or the yen individually within the sample period we used. To the extent that exchange rates in the region shift over time from benchmarking the US dollar towards a broad range of Asian currencies, Asian central banks will find it more attractive to cross-hold Asian bonds. This calls for the development of deep private markets in such assets, as well as institutional prerequisites for internationalizing key regional currencies.asian currency unit; asian currencies; foreign exchange reserves; exchange rate policy; asian central banks

Asian Tigers' Choices: An Overview

This paper considers the choices facing the Asian tiger economies regarding growth strategies that foster trans-Pacific rebalancing. A review of historical data spanning 2000 to 2008 reveals only a slight widening of the overall current account surplus but that there is considerable variation across the countries, with Hong Kong, China exhibiting the biggest increase in the saving and investment (S-I) balance. Meanwhile, cross-correlation coefficient estimates tentatively suggest that changes in the real effective exchange rate do not seem to exhibit a consistent negative lead over changes in the S-I gap in the short run over the past decade. High import leakage, particularly for the ultra small, open economies of Hong Kong and Singapore, calls into question the scope for recalibrating growth drivers towards domestic demand. Nonetheless, the implementation of structural policies such as those aimed at raising the productivity and wages of workers in the services industry as well as the introduction of financial products that alleviates the need for precautionary saving can induce domestic consumer demand, especially for the larger economies of Korea and Taipei,China. Moreover, the rising affluence and living standards in fast growing regional economies such as the People’s Republic of China (PRC) offers the Asian tigers the potential of gearing their trade structure in final goods towards markets in the region, thereby aiding the reduction in trans-Pacific imbalances.asian tiger economies; trans-pacific rebalancing

Asian Currency Baskets: An Answer in Search of a Question?

This paper considers how a regional currency basket and the associated divergence indicators could be used in official surveillance. Recently, proponents of Asian currency baskets have referred to the role the ECU played in constructing exchange rate divergence indicators in Europe as evidence of the intrinsic usefulness of currency baskets for exchange rate monitoring. We show in this paper a number of problems with the use of regional currency-basket based divergence indicators. First, at a technical level, such indicators involve tracking regional exchange rates against a moving currency basket and can obscure underlying movements in bilateral exchange rates. Second, currency baskets generally treat currencies asymmetrically leading to difficulties interpreting the derived measures of divergence. Third, intra-regional exchange rate monitoring can lead to potentially serious N-1 or anchor problems. Some of these difficulties can be addressed by bilateral divergence indicators but means will need to be found to anchor regional exchange rate surveillance vis-à-vis currencies outside the region.

Asian Tigers’ Choices : An Overview

This paper considers the choices facing the Asian tiger economies regarding growth strategies that foster trans-Pacific rebalancing. A review of historical data spanning 2000 to 2008 reveals only a slight widening of the overall current account surplus but that there is considerable variation across the countries, with Hong Kong, China exhibiting the biggest increase in the saving and investment (S-I) balance. Meanwhile, cross-correlation coefficient estimates tentatively suggest that changes in the real effective exchange rate do not seem to exhibit a consistent negative lead over changes in the S-I gap in the short run over the past decade. High import leakage, particularly for the ultra small, open economies of Hong Kong and Singapore, calls into question the scope for recalibrating growth drivers towards domestic demand. Nonetheless, the implementation of structural policies such as those aimed at raising the productivity and wages of workers in the services industry as well as the introduction of financial products that alleviates the need for precautionary saving can induce domestic consumer demand, especially for the larger economies of Korea and Taipei,China. Moreover, the rising affluence and living standards in fast growing regional economies such as the Peoples Republic of China (PRC) offers the Asian tigers the potential of gearing their trade structure in final goods towards markets in the region, thereby aiding the reduction in trans-Pacific imbalances.saving and investment balance, import leakage, trade structure

Asian Currency Baskets : An Answer in Search of a Question?

This paper considers how a regional currency basket and the associated divergence indicators could be used in official surveillance. Recently, proponents of Asian currency baskets have referred to the role the ECU played in constructing exchange rate divergence indicators in Europe as evidence of the intrinsic usefulness of currency baskets for exchange rate monitoring. We show in this paper a number of problems with the use of regional currency-basket based divergence indicators. First, at a technical level, such indicators involve tracking regional exchange rates against a moving currency basket and can obscure underlying movements in bilateral exchange rates. Second, currency baskets generally treat currencies asymmetrically leading to difficulties interpreting the derived measures of divergence. Third, intra-regional exchange rate monitoring can lead to potentially serious N-1 or anchor problems. Some of these difficulties can be addressed by bilateral divergence indicators but means will need to be found to anchor regional exchange rate surveillance vis--vis currencies outside the region.Regional Currency Basket, Exchange Rate Divergence Indicators, Surveillance

The Empirical Relationship Between Exchange Rates and Interest Rates in Post-Crisis Asia

In post-crisis Asia, all crisis-hit countries (except Malaysia) announced a shift from exchange rate based monetary policy framework to the explicit adoption of inflation targeting that uses interest rates as the key monetary policy operating instrument. In this study, we examine the empirical relationship between exchange rates and interest rates, and investigate how the dynamics between them have changed following the crisis. This is carried out by constructing a bivariate VAR-GARCH model for each of the four Asian crisis countries, namely Indonesia, Korea, Philippines and Thailand. The findings suggest these countries do not use interest rate policy more actively to stabilize exchange rates after the crisis, and provide evidence that their domestic currencies exhibit greater sensitivity to competitors’ exchange rates post-crisis. Further, the results indicate that increased exchange rate flexibility has not led to greater stability in interest rates in these economies.Exchange rate, interest rate, bivariate VAR-GARCH model, causation in volatilities

Forecasting the Global Electronics Cycle with Leading Indicators: A VAR Approach

Developments in the global electronics industry are typically monitored by tracking indicators that span a whole spectrum of activities in the sector. However, these indicators invariably give mixed signals at each point in time, thereby hampering efforts at prediction. In this paper, we present a unified framework for forecasting the global electronics cycle by constructing a VAR model that captures the economic interactions between leading indicators representing expectations, investments, orders, inventories and prices. The ability of the indicators to presage world semiconductor sales is assessed by Granger causality tests. The VAR model is also used to derive the dynamic paths of adjustment of global chip sales in response to shocks in each of the leading variables. These impulse response functions conform to our theoretical priors and confirm the leading quality of the selected indicators. Finally, out-of-sample forecasts of global chip sales are generated from the VAR model and compared with predictions from a univariate model as well as a model which uses a composite index of the leading indicators. An evaluation of their relative accuracy suggests that the VAR model's forecasting performance is superior to that of the univariate model and comparable to that of the composite index modelLeading indicators; Global electronics cycle; VAR; Forecasting

Monetary Policy and Asset Prices in a Small Open Economy: A Factor-Augmented VAR Analysis for Singapore

The ongoing global financial turmoil has revived the question of whether central bankers ought to tighten monetary policy preemptively in order to head off asset price misalignments before a sudden crash triggers financial instability. This study explores the issue of the appropriate monetary policy response to asset price swings in the small open economy of Singapore. Empirical analysis of monetary policy based on standard VAR models, unfortunately, is often hindered by the use of sparse information sets. To better reflect the extensive information monitored by Singapore’s central bank, including global economic indicators, we augment a monetary VAR model with common factors extracted from a large panel dataset spanning 122 economic time series and the period 1980q1 to 2008q2. The resulting FAVAR model is used to assess the impact of monetary policy shocks on residential property and stock prices. Impulse response functions and variance decompositions suggest that monetary policy can potentially be used to lean against asset price booms in Singapore.Monetary Policy; Asset Prices; Dynamic Factors; Vector Autoregression

Forecasting Business Cycles in a Small Open Economy: A Dynamic Factor Model for Singapore

We apply multivariate statistical methods to a large dataset of Singapore’s macroeconomic variables and global economic indicators with the objective of forecasting business cycles in a small open economy. The empirical results suggest that three common factors are present in the time series at the quarterly frequency, which can be interpreted as world, regional and domestic economic cycles. This leads us to estimate a factor-augmented vector autoregressive (FAVAR) model for the purpose of optimally forecasting real economic activity in Singapore. By taking explicit account of the common factor dynamics, we find that iterative forecasts generated by this model are significantly more accurate than direct multi-step predictions based on the identified factors as well as forecasts from univariate and vector autoregressions.business cycles; principal components; dynamic factor model; factor-augmented VAR; forecasting; Singapore

Forecasting the Global Electronics Cycle with Leading Indicators: A VAR Approach

Developments in the global electronics industry are typically monitored by tracking indicators that span a whole spectrum of activities in the sector. However, these indicators invariably give mixed signals at each point in time, thereby hampering efforts at prediction. In this paper, we propose a unified framework for forecasting the global electronics cycle by constructing a VAR model that captures the economic interactions between leading indicators representing expectations, orders, inventories and prices. The ability of the indicators to presage world semiconductor sales is first demonstrated by Granger causality tests. The VAR model is then used to derive the dynamic paths of adjustment of global chip sales in response to orthogonalized shocks in each of the leading variables. These impulse response functions confirm the leading qualities of the selected indicators. Finally, out-of-sample forecasts of global chip sales are generated from a parsimonious variant of the model viz., the Bayesian VAR (BVAR), and compared with predictions from a univariate benchmark model and a bivariate model which uses a composite index of the leading indicators. An evaluation of their relative accuracy suggests that the BVAR's forecasting performance is superior to both the univariate and composite index models.Leading indicators; Global electronics cycle; VAR; Forecasting