Empirical Regularities

Figure 1 [ PDF 22.8KB | 1 page ], Figure 2 [ PDF 45.9KB | 1 page ], and Figure 3 [ PDF 45.9KB | 1 page ] show movements in domestic currency value vis-à-vis the US dollar based on their de jure classification. The fixed group of the PRC and Malaysia show steady pegged currencies vis-à-vis the US dollar after the Asian crisis. The PRC has pegged its currency to the US dollar since the depreciation in 1994, while Malaysia has kept its peg since the Asian crisis. However, in recent years, their currencies show frequent deviation from the long-run peg trend (Figure 1).

The intermediate group including Thailand, Indonesia, Taipei,China, and Singapore show higher volatilities in their currencies vis-à-vis the US dollar after the Asian crisis. Especially, the Indonesian rupiah had huge depreciation during the tranquil period of 1999 and 2007. It is not easy to distinguish the intermediate group and free-floating group by tracing the movements in domestic currency vis-à-vis the US dollar. Most members of the free-floating group shows similar patterns of movements in exchange rates.

The policy interest rates in Asia also varied as exchange rates did. Interestingly, the fixed group did not respond much to the US interest rates changes. The PRC and Malaysia have maintained relatively stable policy interest rates from the late 1990s to 2008 (Figure 4 [ PDF 33.8KB | 1 page ]). On the other hand most managed floaters in Asia show trends similar to US interest rates (Figure 5 [ PDF 33.8KB | 1 page ]). In particular, timely responses to a decrease in US interest rates reduce the appreciation pressures in Asian countries. This prevents the expenditure switching effects through exchange rate changes from the interest rate changes between the US and Asian floaters. The free-floating group exhibits less change in interest rates. At the same time, they do not respond much to US interest rate movements in general (Figure 6 [ PDF 27KB | 1 page ]).

Foreign exchange reserves are also used for reducing appreciation pressures in Asia. There has been a strong upward trend in Asian foreign exchange reserves since 2002. This coincides with the depreciation of the US dollar regardless of exchange regimes in Asia (Figure 7 [ PDF 27KB | 1 page ], Figure 8 [ PDF 30.4KB | 1 page ], and Figure 9 [ PDF 30.4KB | 1 page ]).

Table 5 [ PDF 72.2KB | 1 page ] displays major Asian macroeconomic variables. For the fixed group, the volatility of exchange rates is smaller than that of the floater group. Korea, the Philippines, and Indonesia show high standard deviations in exchange rates, while the PRC and Malaysia shows lower standard deviations. Interestingly, Japan and Taipei,China show lower volatility in exchange rates. The volatility of foreign reserves varies with the degree of exchange rate flexibility. The countries with rigid exchange rate regimes show higher volatilities in foreign reserves, while floaters display lower volatilities except for Korea and Japan. Policy interest rates are ambiguous in terms of volatilities based on different exchange regimes. In general, non-floaters should show higher volatility in interest rates, but non-floaters such as the PRC and Malaysia have lower interest rate volatility. On the other hand, floaters such as Indonesia, Philippines, Taipei,China, and Thailand show higher interest rate. This could be related to the inflation level in each country. Those that have higher interest rate volatility also display a higher consumer price index. Fluctuations in output are not distinguishable with the choice of exchange rate regime in general.

Table 6 [ PDF 80.2KB | 1 page ] displays the correlation of interest rates, price level and output of Asian countries with those of the US. Interest rates of the floaters such as Korea, Philippines, and Taipei,China show strong correlation with the US interest rate. However, non-floaters such as the PRC and Malaysia have lower correlation. This might look strange since fixed exchange rate regime should display higher correlation with the US interest rates, but these countries have capital account restrictions that may allow them to have monetary autonomy even under a fixed exchange rate regime. The consumer price index (CPI) in Asian countries has a higher correlation with the CPI of the US in general, except for Japan. This implies higher exchange rate pass-through in those economies. Asian countries' output is highly correlated with the US output in general, except for the PRC which has a lower correlation.

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