The real effective exchange rate and trade balance in selected ASEAN countries

Exchange rate management has been a hot topic in policy maker and academic circles. The 1997-98 Asian crisis has refocused attention on the exchange rate management of East Asian countries. Most views expressed are critical of the pre-crisis US dollar peg regime, citing it as one cause of the crisis. It is said that this regime caused the appreciation of real effective exchange rates (REERs) and the subsequent loss of competitiveness. This article examines the trend of the REER and its impact on the trade balance during the pre-crisis and post-crisis periods in selected ASEAN countries. The main findings of the study are as follows. First, we found that the REER shows a clear trend of appreciation during the pre-crisis period, whereas it reveals a rather stable movement during the post-crisis period. Second, a Johansen multivariate co-integration analysis verified the existence of a stable long-run correlation between the REER and the trade balance. Third, a simulation analysis showed that the pre-crisis trend of the REER had a clearly negative impact on the trade balance, whereas the post-crisis trend of the REER had a more or less neutral effect on it.