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

Author

Listed:
  • Kelvin Ho

    (Hong Kong Monetary Authority)

  • Eric Wong

    (Hong Kong Monetary Authority)

  • Edward Tan

    (Hong Kong Monetary Authority)

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.

Suggested Citation

  • Kelvin Ho & Eric Wong & Edward Tan, 2016. "A New Approach to the Estimation of Equilibrium Real Exchange Rates among East-Asian Economies," Working Papers 132016, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:132016
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    F31; F33; F42; F45;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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