Interdependence and Exchange Rate Regimes in East Asia: Intra-regional Transmissions of Exchange Rate Policies after the Crisis (in Japanese)

Since the onset of the Asian crisis, what characterizes the East Asian exchange rates has been a topic of considerable discussion. In the pre-crisis period, the de facto pegs to the U.S. dollar sometimes destabilized the real "effective" exchange rates of these currencies. Several economists have, thus, proposed the desirability of intermediate exchange rate regimes in East Asia that might stabilize their effective exchange rates. The post-crisis experience in East Asia, however, taught us that the road to the intermediate exchange rate regimes in the region would be pretty hard. After going through steep devaluations and high volatility in 1997-98, several East Asian currencies were allowed to float at low frequencies. The so-called floating exchange regimes were, however, not really floating when we look at high-frequency day-to-day observations. The purpose of this paper is to investigate what affected the post-crisis exchange rates of five East Asian countries: Singapore, Thailand, Korea, Taiwan, and Malaysia. Based on intra-daily observations, we examine how and when these five East Asian currencies changed their correlations with the U.S. dollar and the Japanese yen. During the time zones when East Asian markets were closed, the East Asian currencies kept strong correlations with the U.S. dollar throughout the pos-crisis period. We, however, find structural breaks in the correlations during the time zones when East Asian markets were open. In the post-crisis period, the first structural break arose when Malaysia adopted the fixed exchange rate. The second structural break occurred when Indonesia and Thailand introduced inflation targeting. The structural breaks suggest strong monetary and real linkage among East Asian countries. After early 2000, the East Asian currencies increased correlations with the U.S. dollar and began reverting back to de facto pegs against the U.S. dollar in terms of their growth rates. A noteworthy implication from our empirical results is that a regime switch in an East Asian country had an enormously large impact on the exchange rates of other East Asian countries that had no regime switch. This probably reflects the fact that economic linkage among East Asian countries is tight in monetary and real transactions. A regime switch in a country had a strong impact on its neighboring economies and that the affected economies had another impacts on their neighboring economies. Our empirical studies support this view and suggest that the exchange rate linkage was very important to see why the post-crisis East Asian countries had a tendency reverting back to de facto pegs against the U.S. dollar.