CIRJE-F-181 "Post-crisis Exchange Rate Regimes in East Asia"
Author Name Fukuda, Shin-ichi
Date November 2002
Full Paper PDF file@
Remarks @ Subsequetnly published in T. Ito eds., "A Basket Currency for Asia", Chapter 3 (pp.51-74), Routledge, 2007.
Abstract

More than five years after the onset of the Asian crisis, the characteristics of the exchange rate regimes of East Asian economies remain a topic of considerable discussion. The purpose of this paper is to investigate what affected the values of three ASEAN currencies, the Malaysia ringgit, the Singapore dollar, and the Thai baht after the crisis. The particular interest in our analysis is to explore why the East Asian currencies, which temporarily reduced correlations with the U.S. dollar after the crisis, had a tendency to revert back to de facto pegs against the U.S. dollar in the late 1990s. Based on high-frequency day-to-day observations, we examine how and when these three ASEAN currencies changed their correlations with the U.S. dollar and the Japanese yen in the post-crisis period. Before September 1st 1998, these currencies increased correlations with the Japanese yen in the post-crisis period. In particular, the increased correlations were larger than theoretical correlations based on the trade weights. The increase in correlations with the Japanese yen was, however, temporary. After Malaysia adopted the fixed exchange rate, both the Singapore dollar and the Thai baht increased correlations with the U.S. dollar drastically and began reverting back to de facto pegs against the U.S. dollar. A part of the change was attributable to asymmetric responses to the yen-dollar exchange rate. The change was, however, explained quite well by the strong linkage among the ASEAN countries. This implies that a regime switch in Malaysia had an enormously large impact on the exchange rates of the other ASEAN countries in the post-crisis period.