Accounting for Real Exchange Rate Changes in East Asia

This study measures the proportion of real exchange rate movements that can be accounted for by movements in the relative price of non-traded goods among twenty-one bilateral Asian-Pacific real exchange rates. Following Engel (1999), the decomposition is done at all possible horizons that the data allow – from one month up to 25 years. Evidence presented here is consistent with that from OECD countries. In particular, relative prices of non-traded goods appear to account for virtually none of the movement of Pacific Rim real exchange rates. This pattern appears unaffected by the cross-sectional variation in either income level, or the degree of openness present among these Pacific-Rim economies. The only exception to these findings occurs when we examine fixed (or semi-fixed) exchange rate regimes separately. However, the one exception (the Hong Kong dollar) is anomalous compared to other managed currencies within the sample, and to the recent findings of Mendoza (2000).