Relative Effects of the Dollar and Yen on East Asian Currency Values: Focusing on the Post-Crisis Period

This paper empirically analyzes the relative effects of the dollar and yen on the value of East Asian currencies. We focus especially on countries that have chosen to adopt floating regimes in the post-financial crisis period, such as South Korea, Taiwan, Indonesia, the Philippines and Thailand. First, we calculate a exchange rate flexibility index and carry out a regression using Frankel and Wei's (1994) methodology. The results confirm an increase in the coupling of East Asian currencies vis-a-vis the yen since the 1997 financial crisis. In addition to coupling, we calculate using a non-linear unit root test the exchange rates for four currencies vis-a-vis the yen, excluding the Philippine peso, which has a band-reverting tendency. As a second step, we examine the band-reverting tendency in more detail using the Markov-regime switching model and a three-regime threshold vector error correction model. As the results indicate, band-reverting tendencies are verifiable for all currencies, except for the Philippine peso. In particular, symmetrical band-reverting tendencies are observed whether exchange rates are beyond the upper boundary or below the lower boundary of the band. In the case of the Korean won and Taiwanese dollar, when these two currency exchange rates (measured against the yen) deviate from a certain band, an adjustment process takes place in order to return toward the band.