Is the Renminbi Asia's Dominant Reference Currency? A Reconsideration

Hwee Kwan Chow

China Economic Policy Review (CEPR), 2014, vol. 03, issue 01, 1-20

Abstract: Recent empirical studies show that the Chinese currency renminbi is either becoming or has become a dominant reference currency in Asia. However, the high correlation between the US dollar and renminbi movements hampers the identification of their individual effects on the Asian currencies. In particular, the application of Frankel–Wei regressions to determine the weights of the US dollar and the (unorthogonalized) renminbi in the implicit currency baskets could suffer from endogeneity problems that produce an upward bias in renminbi's estimated weight. This paper reviews the evidence by applying country-specific Vector Autoregression (VAR) models to daily exchange rate data from nine Asian economies namely, Hong Kong, Indonesia, India, Korea, Malaysia, the Philippines, Singapore, Thailand, and Taiwan. The VAR methodology allows for mutual interaction of the exchange rate variables, thereby circumventing the simultaneity bias problem. To overcome the identification problem, we study the relationship between Asian currencies and the US dollar (renminbi) in terms of their bilateral rates against the renminbi (US dollar). All bilateral exchange rates are standardized so that the impulse responses generated are in terms of the number of standard deviations of each series, hence facilitating comparisons across the two sets of models. Generalized impulse response analysis reveals that the US dollar has a significant influence on Asian currencies before the global financial crisis but its impact has weakened post-crisis. By contrast, there is clear evidence that the role of the renminbi in Asian exchange rate determination has increased after the global financial crisis, exerting either greater or a similar impact as the US dollar. Nonetheless, our findings do not support the claim that ade facto"renminbi bloc" has emerged in the region.

Keywords: Currency baskets; renminbi; US dollar; vector autoregressions (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S1793969014500022
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ceprxx:v:03:y:2014:i:01:n:s1793969014500022

Ordering information: This journal article can be ordered from

DOI: 10.1142/S1793969014500022

Access Statistics for this article

China Economic Policy Review (CEPR) is currently edited by Kar-yiu Wong

More articles in China Economic Policy Review (CEPR) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().