A New Approach to the Estimation of Equilibrium Real Exchange Rates among East-Asian Economies

Kelvin Ho, Eric Wong and Edward Tan
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Kelvin Ho: Hong Kong Monetary Authority
Eric Wong: Hong Kong Monetary Authority
Edward Tan: Hong Kong Monetary Authority

No 132016, Working Papers from Hong Kong Institute for Monetary Research

Abstract: In view of the debate on exchange rate stabilization in Asia, this paper introduces a new and original approach to the determination of equilibrium real exchange rates (ERER) across ASEAN+3. Existing literature usually computes a country¡¯s ERER as the real exchange rate that brings the balance of payments of that country in to equilibrium with respect to the rest of the world, following a partial equilibrium approach. For a set of countries belonging to a highly integrated area, separately computing ERERs for each country may lead to mutual inconsistencies. The methodology in this paper achieves a simultaneous determination of the ERERs of all countries in the region, so that the trade balance of each of them is consistently in equilibrium with respect to the rest of the region. Numerical simulations conducted for ASEAN+3 show that such a methodology produces consistent results and may therefore be a useful way of evaluating exchange rate deviations from equilibrium within the area. The method is applied to assess ERER deviations of single currencies of ASEAN+3 vis-¨¤-vis the Chinese yuan and the Japanese yen. The results provide a helpful insight into the relative suitability of these two currencies to play a benchmark role in an exchange rate system for the whole region.

Keywords: F31; F33; F42; F45 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2016-07
New Economics Papers: this item is included in nep-cba, nep-opm and nep-sea
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