The Effects Of Real Exchange Rate Change On East Asia

The change of real exchange rate falls into two levels—trend and short-term volatility, either of which is econometrically measured by the author. Taking example of East Asian countries fore-and-aft the Asian Crisis, the author concentrates on the impact of volatility of short term exchange rate and misaliagment of medium and long term real exchange rate on trade, FDI and economic growth.The finding is that either sharp volatility of short-term exchange rate under floating rate regime or misaliagment of medium and long term real exchange rate under fixed rate regime is detrimental to the stable growth of export-oriented economy in East Asia countries. The current optimal choice for these countries is the intermediate exchange rate regimes represented by BBC. Combining with the reality in these East Asia countries, the author conducts theoretical discussion and empirical study on technical problems such as construction of the pegging currency basket, exchange rate adjustment and regional currency cooperation as well.Finally, in combination with the RMB exchange rate regime reform on Jul. 21st, 2005, the author identifies its BBC characteristics by means of empirical study on the trend of RMB appreciation and the growing volatility of bilateral exchange rate. In the long run, a model of economic growth, which keeps external and internal economic equilibrium, should be found to keep up with the exchange rate regime reform in China. As for the design of path for exchange rate reform, the author suggests that the current pegging currency basket regime be maintained as the basis on which the usage of RMB in Asia could be expanded step by step to realize its regionalization as the regional leading currency. Then at proper time a floating rate in the true sense can be implemented.Chapter one, the prelude, is an introduction of the origin of the study, of the outline, the plot and major conclusions, and of the innovation and deficiency.Chapter two reviews relevant literatures, in terms of theories and empirical studies, on the impact of sharp volatility of short-term exchange rate on trade and FDI. The major theoretical view is that the increase of exchange rate volatility is detrimental to trade, however, exceptions exist. In light of the uncertainty of exchange rate, some economists made researches on investment behaviors of multinational companies in developing countries of diversified levels. They found same facts that the increase of exchange rate volatility restrains inflow of FDI, especially in developing countries, and that there are exceptions in developed countries. These theoretical conclusions are supported by empirical studies, though differing from each other in terms of time, sampling countries and measuring methods of exchange rate volatility, most of which supports that the impact on trade and FDI is negative.In Chapter Three, computing methods of short-term exchange rate volatility are compared. First, in combination with the reality in East Asian countries, the author, using GWMA and AR-GARCH, measures exchange rate volatility fore-and-aft the Asia Crisis. It is found that the volatility of most of these Asian countries except Malaysia, experiences three phases: before the Asia Crisis, the exchange rate volatility was extremely low; however it saw an obvious increase during the period of 1998-2000, hence possessed certain floating rate character; afterwards it decreased a little due to effective control. Second, the author conducts empirical research on the impact of exchange rate volatility on economic growth, trade and FDI. It is found that the increase of exchange rate volatility is detrimental to economic growth and that the major factors causing sustained economic depression after the Asia Crisis are the restrain of exchange rate volatility increase on import and sharp decrease of FDI inflow of these Asian countries.In Chapter four, the author first examines the system impacting the economy by misaligment of real exchange rate, and compares different computing methods of such misaliagment. Second, utilizing the theory of Purchasing Power Parity, the author measures real exchange rate misaliagment in East Asian countries, and finds out the fact that there is increasing overestimation of real exchange rate in these countries fore-and-aft the Asian Crisis. Finally, using correlative analysis, the author conducts empirical research on the system where misaliagment of real exchange rate, economy growth, trade and FDI influence each other in East Asian countries. He finds that there is obvious negative relation between misaliagment of real exchange rate and these macroeconomic factors.In Chapter Five, the author classifies nominal impact, gross demand impact and gross supply impact on real exchange rate respectively; sets up theoretic models to concentrate on issues of adjustment of real exchange rate path and selection of exchange regime; conducts empirical study, using SVAR, on factors impacting real exchange rate in Asia countries in combination with local reality. The author finds that supply and demand are factors bringing obvious impacts on R.Meanwhile, adjustment of nominal exchange rate functions, especially in Thailand and Malaysia where there are similar factors that affecting real exchange rate and relative price level. Impact of supply has a greater effect on real exchange rate appreciation than relative price level; while adjustment of nominal exchange rate can not only better accelerate real exchange rate to move back to its equilibrium, but also inhale real impact caused by change of productivity and trade terms, hence avoid pressure of domestic inflation. Therefore it is necessary to keep proper flexibility.In chapter Six, the author discusses the advantages and feasibility of the BBC regime in East Asia and cooperation of exchange rate, focusing on technical problems like pegging currency selection, time and extent of exchange rate adjustment etc. First, after considering differences between these East Asia countries and major international currency countries like USA and Japan, the author introduces studies on selection of weights of US dollar, Japanese yean and Euro separately in the pegging basket. Second, the author suggests that the rate of exchange rate depreciation equal targeted domestic inflation rate subtracts foreign expected inflation rate and production rate. In accord with this, the rule of central exchange rate can be timely adjusted. Third, currency cooperation in form of mutual currency basket is simply introduced.In Chapter Seven, empirical research is conducted on issues including China's exchange rate regime reform on Jul. 21st, 2005, the composition of RMB pegging basket, and the increase of RMB volatility. The author compares China's economy with East Asian smaller economies, and proposes a plan for growth highlighting external and internal economic equilibrium. As for the design of path for exchange rate reform, the author suggests that the current pegging currency basket regime be maintained as the basis on which the usage of RMB in Asia could be expanded step by step to realize its regionalization as the regional leading currency. Then at proper time a floating rate in the true sense can be implemented.