AMU Deviation Indicators
and Coordinated Exchange Rate Policies
under the Global Financial Crisis*

The International Workshop“East Asian Monetary and Economic Integration”

The Institute of Economic Research, Chuo University, JapanMay 31, 2009

Eiji Ogawa† (Hitotsubashi University)
Junko Shimizu‡ (Senshu University)

This paper is prepared as a Research Paper at the Workshop at the Chuo
University that is held on May 31, 2009.
† Professor of Graduate School of Commerce and Management, Hitotsubashi University.
E-mail: ogawa.eiji@srv.cc.hit-u.ac.jp‡ Associate Professor of School of Commerce, Senshu University, E-mail:jsimizu@isc.senshu-u.ac.jp*

1. Introduction
The global financial crisis which started in the United States in summer of2007 has given great impacts on Asian economies. It also is raising the possibility
that production networks, which have been growing within Asia, will undergo
large-scale restructuring in the future. Large currency fluctuations, not only
against the US dollar but also against other neighboring country currencies within
the region, are undesirable for Asian countries. The transition to a system thatstabilizes intra-regional exchange rates within Asia while allowing those values tofluctuate against the US dollar and the euro is essential for determining the
economic impact of exchange rate fluctuations on intra-regional trade in Asia that
had been expanding in the recent years.
In this paper, we investigate movements of nominal exchange rates, nominal
effective exchange rates (hereafter, NEER) of East Asian countries, and the AsianMonetary Unit (AMU) in the global financial crisis time. Especially we anlyze
differences of the above three kinds of exchange rate data in the global financial
crisis time to figure out factors which affect stability of NEER for each of East Asiancurrencies in the global financial crisis time.
In addition, we investigate relationships among NEER and AMU and AMU
Deviation Indicators for each of East Asian countries, which were studied by Ogawa
and Shimizu (2005). The AMU is a weighted average of East Asian currencies while
the AMU Deviation Indicators show how much each of the East Asian currencies
deviates from a benchmark rate in terms of the AMU. Both the AMU and the AMU
Deviation Indicators are considered as measurements for surveillance under the
Chiang Mai Initiative and coordinated exchange rate policies among East Asian2

countries. If movements of the AMU Deviation Indicators for each of East Asiancurrencies are strongly related to its NEER, monitoring the indicators and keeping
them within a certain band is considered to be an effective exchange rate policy inthe region. Ogawa and Shimizu (2006) have already investigated relationshipamong the NEER and the AMU and the AMU Deviation Indicators. In this paper,
we extend the sample period into one which include the global financial crisis perod
to conduct the same analysis for possible changes in the relationship among the
NEER and the AMU and the AMU Deviation Indicators.
The rest of the paper is organized as follows. Section 2 overviews the previous
researches of desirable currency regime in East Asian countries. Section 3
investigates Asian currencies movements under the global financial crisis. Section 4
focuses on volatilities of the NEER for each of East Asian currencies to compare
relationships between their weights of effective exchange rate on East Asian
countries and their currency regimes. Section 5 investigates relationship between
NEER, and AMU and AMU deviation indicators for each of East Asian currencies.
Section 6 discusses how to use the AMU Deviation Indicators to promote regional
exchange rate coordination. Section 7 summarizes our results and concludes.

2. What is a desirable currency regime in East Asia
Although the Asian currency crisis in 1997 gave us an important lesson that defacto dollar peg was dangerous for East Asian countries, the monetary authorities ofEast Asian countries tended to choose a de facto dollar peg system rather than acurrency basket peg system. As McKinnon (2000) and Ogawa (2002, 2008) pointed

3

out, linkages of East Asian countries to the US dollar have stayed at high level evenafter the Chinese currency regime reform in July 2005.1 Ogawa (2008) showedempirical results that the monetary authority of China continues to stabilize theChinese yuan against the US dollar despite its announcements of adopting amanaged floating exchange rate system with reference to a currency basket whilesome linkages of home currency with a currency basket are found in some of East
Asian countries. Such a coordination failure in exchange rate policies among theauthorities of East Asian countries might increase volatility and misalignments of
intra-regional exchange rates among East Asian currencies.
With the growing dependency of intra-regional trade in East Asian countries, acurrency system to reduce exchange rate risks in international trade andinvestments within the region would be indispensable. One idea is to create acommon currency basket, on which the monetary authorities of East Asian
countries will base to achieve a joint currency basket system. Ogawa and Shimizu(2005) proposed an Asian Monetary Unit (AMU) as a weighted average of thirteen
East Asian currencies (ASEAN + China, Japan, and South Korea) and developed
AMU Deviation Indicators for a surveillance process under the Chiang Mai
Initiative. The AMU Deviation Indicators are used as a benchmark in order that themonetary authorities of the East Asian countries should make regional coordinationin exchange rate policies so as not to deviate each of the East Asian currencies fromthe common currency basket or the AMU. In this way, the countries will be able toachieve stability of intra-regional exchange rates among the East Asian currencies
with jointly floating against the outside currencies which include the US dollar and1

Ogawa and Ito (2000) regarded these movements as a kind of coordination failure.

4the euro.
Some East Asian countries, such as Singapore, China and Malaysia (from July2005) are cited as a country that actually adopts a currency system near the BBC
rule.2 As an indicative proposal, Ogawa and Shimizu (2007) propose a step-by-step
approach from individual currency basket system to a common currency basket
system in East Asia. Ma and McCauley (2008) also discuss that intra-Asianexchange rate stability might build on similar national policies of managing
currencies against their own respective baskets.
On the other hand, McKinnon (2005) proposes so-called the “East Asian dollar
standard”, that East Asian countries should coordinate their policies to keep theirexchange rates stable against the US dollar. He explains that collective
macroeconomic consequences of all East Asian governments’ opting individually to
peg to the US dollar. According to McKinnon’s view, East Asian countries should
coordinate their policies to keep their exchange rates stable against the US dollar.
McKinnon and Schnabl (2009) also suggest that China should rigidly maintain thenominal peg of the Chinese yuan to the US dollar for reasons of monetary andfinancial stability.
In normal period, most of the Asian currencies are strongly correlated with the
US dollar and, in other words, are stable vis-à-vis the US dollar. However, thesecurrencies comparatively fluctuated vis-à-vis the euro and the Japanese yen.
Accordingly, their effective exchange rates are not stable. As Bank of Thailand
clearly explains on their website, they aim to ensure the value of the Thai baht
The BBC rule, where BBC stands for basket, band, and crawl, proposed by Williamson(2000) is pegging a currency to central rate of a currency basket (basket) within acertain pre-determined band from a central rate (band) and adjusting its central rate inorder to neutralize inflation differential (crawling).

2

5

under the condition of “maintaining national competitiveness, as measured throughnot just the US Dollar but the nominal effective exchange rate, which includes
currencies of important trading partners for Thai economy”.
After the Lehman shock in September 15, 2008, a number of Asian currencies
depreciated sharply vis-à-vis the US dollar, with the Japanese yen and the Chinese
yuan being a notable exception. The monetary authorities of East Asian countries
have recognized that the stability against the US dollar is not enough for theireconomy any more. Now, all of the monetary authorities should reconsider which ismore desirable for the region to stabilize their exchange rates against the US dollar
or a currency basket. Moreover, they should consider that it is desirable for the East
Asian economy to make a progress to coordinate their exchange rate policies.

3. Exchange rate movements under the global financial crisis
At first, we check the latest movements in Asian currencies vis-à-vis the US
dollar. Figure 1 shows the Index of Asian currencies vis-à-vis the US dollar(January 2008=100) from January 2008 to March 2009. Since September 2008,
Asian currencies have been depreciating sharply against the US dollar as a result of
the sell-off of local currencies accompanying the capital outflows related withdeleveraging by US and European financial institutions. The only exception has
been the Japanese yen, which has appreciated substantially against the US dollar.
The Chinese yuan has stayed relatively stable vis-à-vis the US dollar in this period
due to their strong relationship with the US dollar. It is like de facto the dollar peg
conducted by the monetary authority of China. The Singapore dollar and the6Malaysia ringgit also have not depreciated largely against the US dollar due totheir keeping a currency basket system. The South Korean won has had larger
depreciation than any other Asian currency. Other Asian currencies, particularly
the Thai baht, have also lost value due to the subprime crisis and fallout from
Lehman Brothers' demise.
Next, we compare the volatilities of AMU, which is a weighted average of East
Asian currencies, and each East Asian currency vis-à-vis the US dollar, the euro and
the Japanese yen. We calculate the standard deviation of daily nominal exchange
rates by year. All of the exchange rates are downloaded from Datastream while the
AMU is available from the website of RIETI.3 Figure 2 shows the volatilities of
nominal exchange rates vis-à-vis the US dollar. Basically there are large
fluctuations in floating currencies (the Japanese yen, the South Korean won, theIndonesian rupiah) and comparatively small fluctuations in de facto US
dollar-pegged currencies (the Chinese yuan) and basket-pegged currencies (theSingapore dollar). The AMU is the second stable relative to each of the East Asiancurrencies. Most of the East Asian currencies are more fluctuated against the US
dollar than the AMU except for the Chinese yuan.
Figure 3 shows the volatilities of nominal exchange rates vis-à-vis the euro. As
a whole, volatilities of Asian currencies vis-à-vis the euro are higher than thosevis-à-vis the US dollar. The AMU is the second lowest while the Singapore dollar
was the lowest. Fluctuation of the Malaysian ringgit also is relatively lower
compared with other East Asian currencies. Figure 4 shows the volatilities of
nominal exchange rates vis-à-vis the Japanese yen. In this case, the AMU is the
Daily data of the AMU and the AMU deviation indicators are freely available at thewebsite of RIETI (http://www.rieti.go.jp/).

37

lowest relative with the East Asian currencies while The Chinese yuan is the second
lowest.
As a whole, we can summarize the above results as follows. Volatilities of
exchange rates of East Asian currencies vis-à-vis the three major currencies
increased sharply in 2008. However, there are comparatively smaller fluctuations incurrency basket-targeted currencies (the Singapore dollar and the Malaysian
ringgit) especially vis-à-vis the euro and the Japanese yen. On one hand, thevolatilities of AMU were lower than most of the East Asian currencies.

4. NEER of East Asian currencies

In this section, we investigate movements in NEER of the East Asiancurrencies. The monthly data of NEER are downloaded from BIS (2005=100).
Figure 5 shows the movements in NEER of the East Asian currencies from January
2000 to March 2009. Figure 5 tells us that NEER of the Chinese yuan has
fluctuated even before the Chinese currency regime reform in July 2005. Since
middle of 2007, NEERs have started to fluctuate more widely for most of the East
Asian countries’. Since September 2008, NEER of the Japanese yen and the Chinese
yuan have appreciated sharply while NEER of the South Korean won has
depreciated dramatically.
Why NEER of some East Asian currencies are fluctuating so volatile in the
period of the global financial crisis? In order to answer this question, we have bettercheck weights on trade-counter countries in their effective exchange rates at first.
Figure 6 shows weights of effective exchange rate for the East Asian currencies in8

2005-2007 according to the BIS statistics.4 As Ma and McCauley (2008) pointed out,
we find that patterns of the weights in effective exchange rates are similar among
the East Asian currencies. Weights on the US dollar are between 12.1% in Indonesia
and 21.0% in China. Weights on the euro are between 16.1% in Indonesia and 24.1%
in China. Weights on the East Asian currencies (the Japanese yen + the Chinese
yuan + the HK dollar + the South Korean won + ASEAN currencies + the Taiwanesedollar) are between 47.1% in Japan and 68.63% in Taiwan. Weight on the East
Asian currencies is the smallest in China (40.7%) among them because a weight on
its home currency is not included. The weight on the US dollar is not the highest for
all of the East Asian currencies. The weight on the euro is the highest for the
Chinese yuan. The weight on the Chinese yuan (+the HK dollar) is the highest for
the Japanese yen, the South Korea won and the Taiwanese dollar. The weight on
the Japanese yen is the highest in the Thai baht, the Philippine peso, and the Hong
Kong dollar. The weight on the ASEAN currencies is the highest for the Singapore
dollar, the Malaysian ringgit, and the Indonesian rupiah. These results indicatethat the weights of the East Asian currencies are high for the East Asian currencies.
It means that their effective exchange rate might be stable for the East Asiancurrencies if their intra-regional bilateral exchange rates are stable each other.
We investigate relationships between the weights on East Asian currencies intheir effective exchange rates and volatilities of NEER for each of the East Asiancurrencies For the purpose, we plot a scatter diagram with the size of volatilities of
NEER (monthly) in vertical axis and the effective exchange rate weights on East
Asian currencies in horizontal axis. Volatility of NEER is calculated as a standard

4

BIS revises the effective exchange rate weights every two years.

9deviation of monthly NEER data. We divide the sample period into two subsample
periods which include a normal period from January 2000 to December 2006 andthe global financial crisis period from January 2007 to March 2009.
Figure 7 shows the results. In the normal period, we can find no clear
relationship between the weights on the East Asian currencies in the NEERs andthe volatilities of NEERs. In the global financial crisis period, the volatilities of
NEERs is smaller than 5 % when the weights on the East Asian currencies in
NEERs are above around 60% except for the Indonesia rupiah. And the volatilities
of NEERs are above around 7% when the weights on the East Asian currencies in
NEERs are smaller than 55%. It implies that the weights on the East Asiancurrencies in NEER is higher, the volatilities of the NEERs becomes lower. In otherwords, NEERs of East Asian currencies with high weights on the US dollar and theeuro were relatively volatile than those of the others.
Next, we investigate how the currency regime affects the volatilities of NEER.
It is often said that the currency regimes varies among the East Asian countries. We
compare the volatilities of NEER in the normal period with those in the global
financial crisis period to investigate their relationships with the currency regimes.
Table 1 shows current exchange rate policy in East Asian countries. Only themonetary authority of Hong Kong adopts the hard peg system, “currency board”.
Five Countries adopt a managed floating exchange rate system while three
countries adopt a free floating exchange rate system. We use market information
about the exchange rate movements to place their exchange rate systems in order.
For example, the Taiwan dollar is almost pegged to the US dollar and the Chinese
yuan is the next among countries with a managed floating exchange rate system.

10

Comparing with the volatilities of daily exchange rates vis-à-vis the US dollar(figure 2), we place the Malaysian ringgit, the Thailand baht and the South Korean
won in order.
Figure 8 shows the scatter diagram which indicates the relationship between
currency regime and the volatilities of NEER. The vertical axis indicates the size ofvolatilities of NEER (monthly) while the horizontal axis indicates the currency
regime ordering from a hard peg (currency board), a managed floating (withreference to a currency basket) to a free floating exchange rate system. ,The
exchange rate system reflects degree of fluctuation of their nominal exchange rates.
In the normal time (January 2000 to December 2006), volatility of NEER of theSingapore dollar was the lowest. Volatilities of NEER of the US dollar pegging
countries, such as Hong Kong, China, and Taiwan, were higher than Singapore.
Volatilities of NEER of the free floating countries were higher than the othercountries. In the global financial crisis period (Jan 2007 to March 2009), volatilities
of NEER of the Japanese yen, the South Korean won (free floating countries) andthe Chinese yuan increased. Volatilities of NEER in the hard peg and nearly hardpeg countries, such as Hong Kong and Taiwan, are kept stable. It is striking thatvolatilities of NEER of the Singapore dollar and the Malaysian ringgit do notchange so much. It implies that the currency basket system could keep the NEER
stable even in the global financial crisis period.
Combining the above results about volatilities of NEERs together, we foundthat NEER of the country, whose effective exchange rate’s weights on the East
Asian currencies are high (Taiwan and Hong Kong) and who executes a currency
basket system (Singapore and Malaysia), are stable in the global financial crisis

11period. The countries, whose effective exchange rate’s weight on the US dollar andthe euro are relatively high like Japan, China and South Korea, should adopt acurrency basket type exchange rate policy in order to make their NEER stable.

5. The relationship between Effective Exchange rates, and the AMU and the
AMU deviation indicators
Ogawa and Shimizu (2005) proposed to create an Asian Monetary Unit (AMU)
as a weighted average of East Asian currencies and calculate AMU Deviation
Indicators, which show how much each of the East Asian currencies deviates from abenchmark rate in terms of the AMU. Both the AMU and the AMU Deviation
Indicators are considered to support coordinated exchange rate policies in East Asia.
Ogawa and Shimizu (2006) investigate the relationship between NEER of AMU
composite currencies and the AMU and the AMU Deviation Indicators. If the
movements of the AMU Deviation Indicators are strongly related to their NEER,
monitoring these indicators and keeping them within a certain band is considered
to be an effective exchange rate policy in the region. Ogawa and Shimizu (2006)
used data during the sample period from January 1999 to December 2004 to findstrong relationships between the AMU Deviation Indicators and the effective
exchange rates except for some currencies.5
In this paper, we extend the sample period to one including the global financial
crisis period to conduct the same empirical analysis. We regress monthly percentage

In Ogawa and Shimizu (2006), the coefficients on the AMU are significant andpositive for the Japanese yen and the Chinese yuan. And the coefficients on the AMU
Deviation Indicator are positive and significant for the eight East Asian currencies.
512change of NEER on monthly percentage change of the AMU and monthly differenceof its AMU Deviation for each of the East Asian currencies to investigate how the
movement of the AMU and each AMU Deviation Indicator explain movement in
NEER for each of the East Asian currencies.6 We estimate the following regression
equation:Δ(log EERi ) = α 0 + α 0 ⋅ Δ(log AMU ) + α 0 ⋅ Δ( AMUDI i )We divide whole sample period (1/2000-3/2009) into two sub-sample periods asfollows:–

Normal period: January 2000 to December 2006–

Global financial crisis period: January 2007 to March 2009

Table 2 shows the analytical results. Both the coefficient on the AMU and theAMU Deviation Indicators are significant and positive. The adjusted R-squared also
are high in both sub-sample periods. Even in the global financial crisis period, thecoefficients on the AMU and the AMU Deviation Indicators are significant andpositive. In China, Indonesia, Japan and South Korea, the coefficients on the AMU
Deviation Indicators are higher in the global financial crisis period than the normal
period. These results imply that a coordinated exchange rate policy by monitoring
the AMU and the AMU Deviation Indicators is effective to stabilize NEER of theEast Asian currencies.

We conduct this regression analysis not in level but in percent change because thedata of nominal effective exchange rates, the AMU and the AMU Deviation Indicator
are not stationary in level, but are stationary in percent of change (in 1st difference for
the AMU Deviation Indicator). We transpose the data of AMU Deviation Indicators into
first difference since they are quoted in the percent of change.
613

6. Coordinated exchange rate policies with the AMU and the AMU Deviation
Indicator
How will we promote coordinated exchange rate policies by using the AMU andthe AMU deviation indicators? Ogawa and Shimizu (2007) propose a step-by-step
approach toward a regional monetary coordination as follows:•

1st step¾

Policy dialogue about exchange rates and exchange rate policies¾

Surveillance by using the AMU and the AMU Deviation Indicators at
Economic Review and Policy Dialogue•

2nd step¾

Managed floating exchange rate system with reference of an individual
currency basket¾

Plus surveillance by using the AMU Deviation Indicators

We have recognized that policy dialogue concerning especially about coordinatedexchange rate policies among East Asian countries should be needed in order tomake regional policy coordination. Under the current circumstances, however, it isso difficult to start even the first step because the governments of East Asian
countries have little policy consensus regarding the coordinated exchange rate
policies. Do we really need any policy consensus? Some East Asian countries havealready adopted an individual currency basket system as presented in the previous
section. In addition, we found that the NEER of these currencies are stable even in
the global financial crisis time. As Ma and McCauley (2008) pointed out thatcoordination is not a necessary condition to reduce intra-Asian currency volatilities,

14the first and second steps might be executed now if each of the monetary authorities
adopts the policy to keep its own effective exchange rate stable.
For example, we can show a coordinated exchange rate policy by using the
AMU Deviation Indicator. Figure 9 shows the movement of the AMU Deviation
Indicators from January 2000 to March 2009. If we decide a fluctuation band of the
AMU Deviation Indicators +/-15%, which is the same as currency band of the
Exchange Rate Mechanism (ERM) under the European Monetary System (EMS)
after 1992 and the ERM II except for the Denmark crone, we found that all of theEast Asian currencies except for the Philippine peso and the Lao kip were within
the +/-15% band from 2000 to middle of 2005. It means that exchange rates of theEast Asian currencies were naturally managed within the band without any
coordinated exchange rate policies. However, since 2006 the AMU Deviation
Indicator of the South Korean won has started to appreciate beyond the upper bandof 15% while at the same time the AMU Deviation Indicator of Japanese yen has
declined below zero. The AMU Deviation Indicators of the Thai baht and theSingapore dollar also followed the South Korean won.
What motivated those currencies to deviate from benchmark level? It is foundthat yen carry trades between the Japanese yen and those appreciating currencies
destabilized the AMU Deviation Indicators (Ogawa and Yoshimi (2009)). Thesephenomena suggest that coordinated monetary policies also should be consideredwith coordinated exchange rate policies. Table 3 shows the latest policy interest rate
and money market rate (3 month) in East Asian countries. There are still large
differences between the lowest country (Japan) and the highest country (Indonesia).
However, the differences of 3month rates are becoming narrow due to the latest

15

global financial crisis. Accordingly, it is a good chance to discuss issues on
coordinated monetary policies as well as the coordinated exchange rate policies.

7. Conclusion
In this paper, we investigate the movement of nominal exchange rates, NEER
of East Asian currencies, and the AMU in the global financial crisis time. We foundthat the volatilities of exchange rates of the East Asian currencies vis-à-vis thethree major currencies increased sharply in 2008. However, there are comparatively
small fluctuations in basket-pegged currencies especially vis-à-vis the euro and theJapanese yen. Moreover, the volatilities of AMU were mostly lower than the East
Asian currencies. Regarding the movement in NEER, we found that NEER of mostof the East Asian currencies have started to fluctuate up and down since 2007.
Since September 2008, NEER of the Japanese yen and the Chinese yuan haveincreased sharply while NEER of the South Korean won has depreciateddramatically. The relationship between NEER volatilities and weights on the East
Asia currencies in effective exchange rate suggested us that the weights on the East
Asian currencies is higher, the volatilities of NEER becomes lower. Also we foundthat a currency basket system could stabilize NEER even in the global financial
crisis time.
The analysis on the relationship between NEER and the AMU and the AMU
Deviation Indicator showed the strong relationships between NEER of East Asiancurrencies and the AMU and the AMU Deviation Indicators. Their relationships
mostly do not change in the global financial crisis time. Accordingly, monitoring

16

both the AMU and the AMU DI is effective to stabilize NEER of East Asiancurrencies.
At the moment, individual basket system is desirable for Asian countries.
Because weights in NEER are mostly similar among East Asian currencies, asimilar policy of stabilizing home currency against their NEER can materialize thecoordinated exchange rate policy without any strong consensus for a while. In the
future, however, coordinated monetary policies also should be considered with thecoordinated exchange rate policies.
Turmoil in the U.S. financial markets is still expected to have significant
impacts on East Asian countries. Although the direct impact of the global financial
crisis was relatively small in East Asia, they have begun experiencing significant
subprime mortgage fallout with their domestic economies affected by declining
exports to the United States, falling stock prices and so forth. Sudden changes incapital flows caused by the global financial crisis have a large effect on foreignexchange rates. Under these circumstances, it is necessary to keep a close eye on
foreign exchange rate movements. And what must be kept in mind are currency
measurements in terms of effective exchange rates, rather than focusing solely on
their nominal exchange rate vis-à-vis the US dollar. In this respect, the AMU
Deviation Indicators, which show intra-regional exchange rates among the East
Asian currencies, play a very important role.

17References
Ma, G. and R. McCauley, 2009, “The evolving East Asian exchange rate system,”for Keio/ADBI/FSA workshop on “Asian exchange rates and currency markets”
on March 24, 2009.

McKinnon, R. I., 2000, “After the crisis, the East Asian dollar standard resurrected:
An interpretation of high-frequency exchange rate pegging,” August.

McKinnon, R. I., 2005, “Exchange Rates under the East Asian Dollar Standard:
Living with conflicted virtue,” MIT press.

McKinnon, R. I. and G. Schnabel, 2009, “China’s financial conundrum and global
imbalances,” BIS working papers No. 277.

Ogawa, E., 2002, “Should East Asian countries return to a dollar peg again?” :in P.
Drysdale and K. Ishigaki eds. East Asian Trade and Financial Integration: New

Issues, Asia Pacific Press, pp.159-184.

Ogawa, E. and T. Ito, 2000, “On the desirability of a regional basket currency
arrangement,” NBER, Working Paper, no. 8002.

Ogawa, E. and J. Shimizu, 2005, “ AMU deviation indicator for coordinatedexchange rate policies in East Asia,” RIETI Discussion Paper, no.05-E-017.

18

Ogawa, E. and J. Shimizu, 2006a, "Stabilization of effective exchange rates undercommon currency basket systems," Journal of the Japanese and International
Economies, vol.20, No.4, p590-611.

Ogawa, E. and J. Shimizu, 2006b, “AMU Deviation Indicators for CoordinatedExchange Rate Policies in East Asia and their Relationships with Effective
Exchange Rates,” World Economy, vol.29, Issue 12, p1691-1708.

Ogawa, E. and J. Shimizu, 2007, “Progress toward a Common Currency Basket
System in East Asia,” RIETI Discussion Paper Series, 06-E-038.

Ogawa, E. and T. Yoshimi, 2008, “Widening Deviation among East Asian
Currencies,” RIETI Discussion Paper Series 08-E -010.

Ogawa, E. and T. Yoshimi (2009) “Analysis on β and σ Convergences of East
Asian Currencies,” RIETI Discussion Paper Series, forthcoming.

19

Figure 1. Changes in the Exchange Rates of Asian Currencies against the US dollar
Changes in the exchange rates of Asian currencies against the US$

Exchange rate
（2008/1/3＝100）（Jan2008=100）

160

CHINESE YUAN

150
INDONESIANRUPIAH140

depreciation

JAPANESE YEN

130
120

SOUTH KOREAN
WON

110

MALAYSIAN
RINGGIT

100

PHILIPPINE PESO

90
SINGAPORE $80

appreciation

THAI BAHT
09
ry
-

08
r-

ua
Ja
n

m
ce

De

No

ve
m

be

be

r-

r0

08

8

8
O

ct
ob
e

r0

8

be

t0

te
m

Se
p

Au

gu
s

lyJu

-0

08

8

8
ne
Ju

ay

-0

08
M

08

ril
Ap

har
c
M

ry
-

08

08
ua

Fe

br

ar
y-

Ja
nu

Ja

nu

ar
y-

08

70

（Source：Datastream）

Figure 2. Foreign Exchange Volatilities vis-à-vis the US dollar
Foreign Exchange Volatilities vis-à-vis the US dollar(standard deviation of daily exchange rates, %)
1.80%
1.60%
1.40%
1.20%
1.00%
0.80%
0.60%
0.40%
0.20%
0.00%
AMU
China
Indonesia
Japan
South Korea
Malaysia
Philippines
Singapore
Thailand

2000
0.22%
0.00%
1.00%
0.62%
0.55%
0.00%
0.61%
0.22%
0.48%

2001
0.22%
0.00%
1.34%
0.62%
0.52%
0.01%
0.87%
0.28%
0.30%

2002
0.23%
0.00%
0.71%
0.62%
0.59%
0.02%
0.41%
0.27%
0.45%

2003
0.19%
0.00%
0.44%
0.51%
0.56%
0.03%
0.39%
0.26%
0.31%

2004
0.22%
0.00%
0.53%
0.61%
0.39%
0.02%
0.19%
0.29%
0.26%

2005
0.23%
0.13%
0.75%
0.53%
0.43%
0.15%
0.26%
0.28%
0.29%

2006
0.19%
0.07%
0.62%
0.49%
0.40%
0.39%
0.41%
0.24%
0.39%

2007
0.17%
0.10%
0.40%
0.60%
0.29%
0.29%
0.48%
0.23%
0.85%

2008
0.31%
0.14%
0.90%
1.04%
1.67%
0.44%
0.60%
0.48%
0.72%

(Author’s calculation. All exchange rates are from Datastream)

20

Figure 3. Foreign Exchange Volatilities vis-à-vis the euro
Foreign Exchange Volatilities vis-à-vis the euro
(standard deviation of daily exchange rates, %)
1.60%
1.40%
1.20%
1.00%
0.80%
0.60%
0.40%
0.20%
AMU
China
Indonesia
Japan
South Korea
Malaysia
Philippines
Singapore
Thailand

2000
0.78%
0.72%
1.31%
0.97%
0.99%
0.72%
0.97%
0.74%
0.89%

2001
0.70%
0.69%
1.59%
0.82%
0.92%
0.69%
1.15%
0.70%
0.76%

2002
0.49%
0.55%
0.82%
0.63%
0.72%
0.55%
0.61%
0.52%
0.59%

2003
0.54%
0.59%
0.70%
0.62%
0.76%
0.59%
0.70%
0.53%
0.59%

2004
0.58%
0.64%
0.76%
0.68%
0.68%
0.64%
0.63%
0.53%
0.60%

2005
0.46%
0.55%
0.86%
0.50%
0.54%
0.56%
0.56%
0.46%
0.51%

2006
0.41%
0.47%
0.69%
0.47%
0.56%
0.58%
0.58%
0.42%
0.53%

2007
0.35%
0.36%
0.48%
0.66%
0.41%
0.39%
0.58%
0.33%
0.92%

2008
0.82%
0.86%
1.31%
1.29%
1.64%
0.83%
0.93%
0.70%
1.05%

Figure 4. Foreign Exchange Volatilities vis-à-vis the Japanese yen

Foreign Exchange Volatilities vis-à-vis the Japanese yen(standard deviation of daily exchange rates, %)
2.50%

2.00%

1.50%

1.00%

0.50%

0.00%
AMU
China
Indonesia
South Korea
Malaysia
Philippines
Singapore
Thailand

2000
0.43%
0.62%
1.13%
0.76%
0.62%
0.91%
0.58%
0.70%

2001
0.43%
0.62%
1.50%
0.68%
0.62%
1.02%
0.54%
0.58%

2002
0.42%
0.62%
0.90%
0.72%
0.62%
0.68%
0.47%
0.65%

2003
0.35%
0.51%
0.62%
0.67%
0.51%
0.62%
0.43%
0.48%

2004
0.40%
0.61%
0.70%
0.61%
0.61%
0.59%
0.45%
0.52%

2005
0.33%
0.51%
0.84%
0.52%
0.55%
0.52%
0.37%
0.44%

2006
0.34%
0.49%
0.75%
0.57%
0.57%
0.60%
0.37%
0.54%

2007
0.48%
0.61%
0.76%
0.68%
0.68%
0.77%
0.68%
1.06%

2008
0.84%
1.05%
1.40%
2.13%
1.14%
1.22%
1.19%
1.27%

(Author’s calculation. All exchange rates are from Datastream)21

Figure 5. NEER of East Asian currencies
The Nominal Effective Exchange Rates of East Asian currencies(BIS, 2005=100)(2005=100)

150

China

Indonesia

Japan

South Korea

Malaysia

Philippines

Singapore

ThailandHong Kong

Taiwan

140
130
120
110
100
90
80
70

Ja
nu
ar
ySe M 00
pt ayem 0
b 0
Ja ernu 00
arySe M 01
pt ayem 0
b 1
Ja ernu 01
arySe M 02
pt ayem 0
b 2
Ja ernu 02
arySe M 03pt ayem 0
b 3
Ja ernu 03
arySe M 04
pt ayem 0
b 4
Ja ernu 04
arySe M 05
pt ayem 0
b 5
Ja ernu 05
arySe M 06a
pt yem 0
b 6
Ja ernu 06
arySe M 07
pt ayem 0
b 7
Ja ernu 07
arySe M 08
pt ayem 0
b 8
Ja ernu 08
ar
y09

60

Source: BIS(Source: BIS)
Figure 6. BIS Effective Exchange Rate Weights (2005-2007)

Indonesia : BIS Effective Exchange rate
weights (2005-2007)

China : BIS Effective Exchange rate
weights (2005-2007)
ROW, 14.1

ROW, 10.4

US, 12.1

Taiwan, 3.0
ASEAN,
24.7
Korea, 4.9
China+HK,
11.9

EU, 17.2

Japan, 15.8

Taiwan,6.6

US, 21.0

ASEAN,
8.3
Korea, 8.2
China+HK,
Japan,
0.8
16.8

EU, 24.1

22

Figure 6 (continued)
Japan : BIS Effective Exchange rate
weights (2005-2007)

South Korea : BIS Effective Exchange
rate weights (2005-2007)
ROW, 11.9
Taiwan, 4.0

ROW, 12.1
Taiwan, 4.1

US, 20.5

ASEAN,
11.9

ASEAN,
8.3,
China+HK,
22.5,

Singapore : BIS Effective Exchange rate
weights (2005-2007)
ROW, 8.1
Taiwan,5.0
ASEAN,
19.6

US, 15.1

EU, 17.7

ROW, 6.6

Taiwan,4.6
ASEAN,
19.4

US, 18.1

EU, 16.6

China+HK,
14.4

Japan,
13.3

Thailand : BIS Effective Exchange rate
weights (2005-2007)

ROW, 10.7
US, 18.1

ASEAN,
14.8
EU, 16.1
Korea, 6.1
China+HK,
13.2

Malaysia : BIS Effective Exchange rate
weights (2005-2007)

Korea, 4.9

Japan,
11.9

Philippines : BIS Effective Exchange
rate weights (2005-2007)

Taiwan, 5.6

Japan,
18.5

ROW, 8.7

Korea, 5.4
China+HK,
17.3

EU, 19.1

EU, 20.4

Korea, 6.9
China+HK,
24.2

US, 15.8

Taiwan, 4.0
ASEAN,
14.9

US, 13.0
EU, 16.2

Korea, 4.3
Japan, 19.5

China+HK,
15.0

Japan,
21.9

23

Figure 6 (continued)
Taiwan : BIS Effective Exchange rate
weights (2005-2007)

Hong Kong : BIS Effective Exchange rate
weights (2005-2007)

ROW, 8.9

ROW, 13.0

US, 15.7

ASEAN,
10.4
Korea, 7.2

US, 10.9

Taiwan,4.9

EU, 13.1

ASEAN,
27.6

Japan,
13.2

EU, 15.7

China+HK,
21.6

Japan,
20.6

Korea, 4.9 China+HK,
12.4(Source: BIS)
Figure 7. NEER Volatilities and NEER weights on Asia
NEER vo lat ilit y an d NEER we igh t s o n Asia
(1 / 2 0 0 0 - 1 2 / 2 0 0 6 )NEER volatilities

14
12

Phillippines

10

Indonesia

8
Korea

6

China

Japan

Hong Kong
Malaysia
ThailandTaiwan42Singapore

0
40

45

50

55

60

65

70

NEER weights on Asia (%)

NEER vo lat ilit y an d NEER we igh t s o n Asia
(1 / 2 0 0 7 - 3 / 2 0 0 9 )
16
Korea
14
NEER volatilities

12
Japan
10
8

Indonesia
China

6
4

Malaysia

2

Phillippines
Hong Kong
ThailandSingapore

0
40

50

60

Taiwan70

NEER weights on Asia (%)(Author’s calculation)

24

Figure 8. NEER Volatilities and Currency Regime

Volatilities of EER( (1/2007-3/2009)

Volatilities of EER( (2000-2006)

16

14.00

Korea

14

12.00

Philippines
12

10.00

Indonesia

Japan
10

8.00

8

Korea

Indonesia
China

6.00

China

Japan
4.00

Malaysia
ThailandHong Kong

Taiwan6
Philippines

4

Thailand

2.00

2Singapore
4

6

TaiwanSingapore

0.00

Free
0 Float2

Hong Kong
Malaysia

8Peg
10 to US$
12

0
0
2
Free
Float

4

6

8

Peg10to US$12(Author’s calculation)25

Jan-00
Mar-00
May-00Jul-00
Sep-00
Nov-00
Jan-01Mar-01
May-01
Jul-01
Sep-01
Nov-01
Jan-02Mar-02
May-02
Jul-02
Sep-02
Nov-02Jan-03Mar-03May-03
Jul-0 3
Sep-03
Nov-03Jan-04Mar-04
May-04
Jul-04
Sep-04
Nov-04Jan-05Mar-05
May-0 5Jul-05
Sep-05
Nov-05Jan-06Mar-06
May-06
Jul-06
Sep-06
Nov- 06
Jan-07Mar-0 7
May-07
Jul-07Se p-0 7
Nov-07Jan -08
Mar-08May-08
Jul-08
Sep-08Nov-08Jan-09Mar-09Figure 9. AMU Deviation Indicators (Jan 2000 – Mar 2009)
Figure 2. Nominal AMU Deviation Indicators(benchmark year=2000/2001,basket weight=2003-2005,daily)(%)

50
Brunei Darussalam
Japan
MyanmarVietnam
CambodiaSouth Korea
Philippines
China P.R.
LaosSingapore
Indonesia
Malaysia
Thailand

40

30

20

10

0

+/- 15%
Fluctuation
band

-10

-20

-30

-40

(Source: RIETI)

26

Table 1. Exchange rate policy in East Asian countries
Exchange rate policy
Hong Kong
TaiwanChina
Malaysia
ThailandCurrency Board
Managed Float (reference to a currency basket)
Managed Float (reference to a currency basket)
Managed Float (reference to a currency basket)
Managed Float

South Korea
Philippines
Indonesia
Japan

Managed Float
Free Float
Free Float
Free Float

Degree offluctuation
lowesthighestSource: Central Bank's website

27

Table 2. Relationship between NEER and the AMU & the AMUDI
Sample period 1/2000-12/2006 obsevations 83
China
VariableC

Coef.

-0.0324

DLOG(AMU) 0.6405
D(AMUDI)
Adj. R2

Indonesia

Std.error Coef.

(0.0260) -0.0014*** (0.0366)

Japan

Std.error Coef.

0.4326(0.0542) -0.0242*** (0.0633)

South Korea

Std.error Coef.

0.5803

Std.error(0.0231) -0.0153** * (0.0304)

0.4445(0.0289)*** (0.0372)

1.4079 *** (0.0338) 1.0342 *** (0.0172) 1.1228 ** * (0.0201) 0.9843 *** (0.0249)
0.9561

0.97880.98590.9725

Sample period 1/2007-3/2009 obsevations 27
China
VariableC

Indonesia

Japan

South Korea

Coef.

Std.error Coef.

Std.error Coef.

Std.error Coef.

Std.error-0.0740(0.1270) 0.0602(0.1096) 0.0670(0.1129) 0.0816(0.0993)

DLOG(AMU) 1.1124 *** (0.1710) 0.3362 ** (0.1508) 0.5017 ** (0.2169) 0.4192 *** (0.1347)
D(AMUDI)
Adj. R2

1.5831 *** (0.1357) 1.1621 *** (0.0398) 1.2862 ** * (0.0643) 1.0979 *** (0.0324)
0.83830.9722

0.97380.9813

Autuor's calculation. Significance level: *90%, **95%, ***99%.

Sample period 1/2000-12/2006 obsevations 83
Malaysia
VariableC

Coef.

-0.0094

DLOG(AMU) 0.4783
D(AMUDI)
Adj. R2

Philippines

Std.error Coef.

(0.0183) 0.0234*** (0.0252)

0.3258Singapore

Std.error Coef.

(0.0320) -0.0089*** (0.0367)

ThailandStd.error Coef.

0.4171

Std.error(0.0207) -0.0165** * (0.0257)

0.3127(0.0333)*** (0.0392)

1.1854 *** (0.0237) 1.1390 *** (0.0224) 0.9812 ** * (0.0337) 0.9367 *** (0.0317)
0.96940.96940.91450.9151

Sample period 1/2007-3/2009 obsevations 27
Malaysia
Variable
C

Philippines

Singapore

Coef.

Std.error Coef.

Std.error Coef.

0.0525(0.0886) 0.0967(0.0819) 0.1396*

ThailandStd.error Coef.

Std.error(0.0766) -0.0427(0.1949)

DLOG(AMU) 0.4774 *** (0.1239) 0.3451 *** (0.1102) 0.3402 ** * (0.1209) 0.4911 *D(AMUDI)
Adj. R2(0.2623)

0.7914 *** (0.0836) 1.0488 *** (0.0469) 0.5515 ** * (0.0796) 0.2563 *** (0.0769)
0.77230.95070.64310.3133

Autuor's calculation. Significance level: *90%, **95%, ***99%.

28

Table 3. Policy Rate and 3 month Market Rate
Policy Rate

3 month Market Rate

China

2.25
5.31

1year Deposit Rate
1year Lending Rate

1.207

SHIBOR

Indonesia

7.25

Bank Indonesia Rate

8.22

JIBOR

Japan

0.10

Target O/N call rate

0.567

TIBOR

South Korea

2.00

BOK Base Rate

2.41

KORIBOR

Malaysia

2.00

O/N Policy Rate

2.12

KLIBOR

Philippines

4.50
6.50

BSP O/N Borrowing Rate
BSP O/N Lending Rate

3.688

PHIBOR

0.5

SIBOR

1.425

BKIBORn.a.

Singapore
Thailand

1.25

1day Repurchase Rate

Source: AsianBondOnlines (ADB), All data are as of May 2009.

29