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This study adds to a recent and growing literature that assesses the effects of macroprudential policy. We compare the effects of monetary policy and loan-to-value ratio shocks for Korea, an inflation-targeting economy and an active user of loan-to-value limits. We identify shocks using sign restricted structural VARs and rely on a recent approach within this method to conduct structural inference. This study finds that both monetary policy and loan-to-value ratio shocks have effects during the period that our sign restrictions applies on different measures of credit, i.e., real bank credit, real total credit and real household credit, as well as on real output, real consumption and real investment. We find though that loan-to-value ratio shocks have negligible effects on the price level. Both shocks, however, have non-negligible effects on real house prices, evidence that go beyond the period of the imposed sign restrictions. These findings indicate that for the period covered by this study, limits on loan-to-value achieved their financial stability objectives in Korea in terms of limiting credit and house price appreciation under an inflation-targeting regime. Furthermore, it attained these objectives without posing any threat to its price stability objective. Overall, these findings suggest that limits on loan-to-value have important aggregate consequences despite it being a sectoral, targeted policy instrument.

The policy importance of non-core liabilities (bank liabilities other than equity and retail deposits) has risen to prominence in recent years with a number of studies highlighting it as a useful indicator of financial procyclicality and vulnerability. In this paper, we look at non-core liabilities in relation to its role in the transmission of monetary policy, particularly by examining how the interest rate channel of monetary policy is affected by non-deposit liabilities. We analyse this issue in the context of an emerging economy experience of Indonesia, which in recent years, has seen an increased reliance of its banking sector on non-core funding. Our investigation employs available bank-level data on non-core liabilities and lending rates in Indonesia over the period October 2011 to July 2016. We find that including non-core liabilities in the estimation has an effect, relative to the baseline, of stronger overall and immediate pass-through, albeit with a more sluggish adjustment towards the...

Developing economies are seeking to promote financial inclusion, i.e., greater access to financial services for low-income households and firms. This raises the question of whether greater financial inclusion tends to increase or decrease financial stability. A number of studies have suggested both positive and negative impacts on financial stability, but very few empirical studies have been made. This study focuses on the implications of greater financial inclusion for small and medium-sized enterprises (SMEs) for financial stability. It estimates the effects of measures of the share of bank lending to SMEs on two measures of financial stability — bank nonperforming loans and bank Z scores. We find some evidence that an increased share of lending to SMEs aids financial stability by reducing non-performing loans (NPLs) and the probability of default by financial institutions.

There is a long-running debate on the effectiveness of currency interventions with the issue of how to overcome the two empirical manifestations of the problem of endogeneity (simultaneity and self-selection bias), a constant challenge in this literature. To address this problem of endogeneity, we employ a recent extension of the potential outcomes approach of micro-econometrics to a time-series setting. Another crucial contribution of our study is that we made every effort on a high-frequency basis in controlling for the effects of monetary policy on the exchange rate, a crucial aspect often neglected in this literature. We conduct our analysis using unique daily data on currency interventions in Mongolia to examine the impact of these interventions on the changes in the MNT/USD exchange rate and its volatility. Our results confirm some of the previous findings from the literature, but also offer some new key findings. Both purchases and sales of US dollars are effective in moving changes in the MNT/USD in the desired direction when implemented frequently, and the effects are quite persistent. Mainly sales of USD when also implemented frequently can help reduce the volatility in the MNT/USD exchange rate. Although, our full sample estimates using quantile local projections show that both sales and purchases of USD can reduce volatility at low and moderate levels, while frequent and smaller sales of USD can help reduce high volatility in the exchange rate.

This paper characterizes proxy measures of financial cycles using available data on four East Asian economies, viz., Hong Kong, Malaysia, the Philippines and Thailand. Spectral analysis is adopted to characterize the financial cycles and these cycles are compared with the business cycles of the four East Asian economies. The empirical findings indicated that with the exception of the equity price growth in Hong Kong, the period of the proxy measures for financial cycles is slightly longer than the period of the business cycle. More to the point, there is no evidence to show that the period of the proxy measures for financial cycles in these economies are operating at low frequencies similar to the period of the cycles of between 8 to 32 years observed for advanced economies such as the US, UK and Germany. Taking one step further, the paper finds that the financial cycles of these four economies are better captured by a band-pass filter estimated using the periods obtained in the paper as opposed to using long period cycles of between 8 to 32 years. These findings imply that one needs to be careful in making an a priori assumption on the frequency range the financial cycle is believed to operate.

Using a unique data set on provincial net factor income flows disaggregated across the three asset classes of debt, equity and FDI reinvested earnings in Korea, we investigated how these asset channels impacted consumption risk sharing during the Global Financial Crisis and the European sovereign debt crisis. Adopting spatial panel methods, this study found that net receipts of debt, equity and FDI retained earnings have all contributed favorably to consumption risk sharing during these crises episodes, with FDI retained earnings robustly positive in its contribution in buffering shocks to consumption. We also found suggestive evidence that net equity receipts rather than net debt receipts contributed more to risk sharing during these episodes. Overall, our results indicate that different asset channels can provide the insurance needed to cushion the economy against adverse shocks.

This paper examines whether the renminbi (RMB) has supplanted the US dollar as the major anchor currency in the implicit currency baskets of East Asian economies. First, we demonstrate that existing techniques to address the problem of severe multicollinearity in estimations of the Frankel–Wei regression model, with the movements in both the US dollar and the RMB included on the right-hand side of the equation, remain limited in providing stable and robust results. We then propose a simple modification of the Frankel–Wei regression model to estimate the RMB weight in an economy's implicit currency basket. We show that this new method yields results that are superior to those obtained by existing techniques. Using the new method, we find that the US dollar continues to be the dominant anchor currency and that there is not yet an RMB bloc in East Asia, contrary to claims made by some recent studies. The RMB has taken on some importance in the implicit currency baskets of several East Asian economies in recent years and this appears to have occurred at the expense of the yen. In short, despite the rising importance of the RMB, it has not eclipsed the US dollar as the dominant anchor currency in East Asia. These conclusions are robust to alternative specifications of the modified Frankel–Wei regression model and the use of a structural break estimation technique.

Along the lines of the treatment effects literature, this paper empirically revisits the issue of the so-called “intervention effect”, i.e., the effectiveness of official foreign exchange intervention on the movement of the exchange rate. We extended in a continuous treatment setting the inverse probability weights estimator developed by Jorda and Taylor (2015) and Angrist, Jorda and Kuersteiner (forthcoming) to control for self-selection bias. We then illustrate the application of this technique by examining the effectiveness of official daily interventions by Japanese monetary authorities in the JPY/USD market. In accordance with existing evidence using this intervention data, this paper finds that periods of intervention characterized by large, infrequent and sporadic interventions are effective in moving the changes in the exchange rate in the desired direction. We also find evidence that the intervention effect does not last longer than two days after the intervention takes place.

The policy importance of non-core liabilities has risen to prominence in recent years with the studies of Shin and Shin (2010), Hahm, et al., (2010) and Hahm, et al., (2013) highlighting it as a useful indicator of financial procyclicality and vulnerability. In this paper, we look at non-core liabilities in relation to its role in the transmission of monetary policy, particularly by examining how the interest rate channel of monetary policy is affected by non-deposit liabilities. We analyse this issue in the context of an emerging economy experience of Indonesia, which in recent years, has seen an increased reliance of its banking sector on non-core funding. Our investigation employs available bank-level data on non-core liabilities and lending rates in Indonesia over the period October 2011 to July 2016. We find that including non-core liabilities in the estimation has an effect, relative to the baseline, of stronger overall and immediate pass-through, albeit with a more sluggish adjustment towards correction of disequilibrium in the next period. The overall effect is that non-core liabilities make the duration lengthier for the monetary policy rate to transmit to bank lending rates in Indonesia.

The possible crucial role of international bank lending in the transmission of adverse economic disturbance from advanced economies to emerging economies in the recent global financial crisis has once again placed this type of capital flows into sharper scrutiny both in academic and policy discussions. We construct macro-and micro-panel data on international bank lending to six Asian economies, viz., Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand, to analyze a number of objectives. We first examine the influence of a number of critical determinants not only to overall international bank lending but also to cross-border bank lending, and obtained one critical finding in this part of the study that cross-border lending by international banks tend to pull-out from host economies during difficult times in source economies, whereas such retrenchment are not evident on an aggregated basis. This may suggest that encouraging brick-and-mortar affiliates of international banks to ‘set up shop’ in recipient economies may be the judicious choice for these economies. We next critically examine the difference between subsidiaries and branches of international banks in terms of their ability to shield themselves from the financial difficulties of their global parent banks and thus their ability to continue lending in destination markets. According to our results, foreign bank subsidiaries are more capable in this regard. This finding carries with it the obvious attraction of favoring an organizational banking structure that is biased towards subsidiaries. However, national banking regulators should remember that apart from encouraging a host of other domestic and cross-border initiatives, encouraging the entry of brick-and mortar subsidiaries of international banks should not viewed as a panacea to the financial stability concerns not only in Asia but also across emerging markets in general.

This study empirically examines the issue of whether countries that target inflation systematically experience higher exchange rate volatility. A major challenge that immediately confronts such analysis is that countries do not choose their monetary regimes in a random fashion. In this paper, an attempt is made to take into account the problem of self-selection in the countries’ decision to target inflation via a treatment effect regression that estimates jointly the probability of being an inflation targeter and the outcome equation. The analysis indicates that nominal and real effective exchange rate volatility are both lower in inflation-targeting countries than countries that do not target inflation. More importantly, the analysis also suggest that developing countries that target inflation have lower nominal and real effective exchange rate volatility than non-inflation-targeting developing countries; in the case, however, of inflation-targeting industrial countries, it is found to be higher.

We demonstrate that the economies of Indonesia, Korea, Philippines and Thailand, which are among the first group of emerging markets to embrace the inflation targeting framework of monetary policy, tend to adopt a form of an asymmetrical exchange rate behaviour wherein appreciation pressures are restrained more substantially than depreciation pressures. In short, these four Asian economies exemplify aversion to appreciations such that greater flexibility is allowed only one side of the market. Formal econometric tests using the smooth transition autoregressive and the Markov regime switching models confirm this hypothesis of aversion to appreciation and show that the central banks of these four economies tend to tolerate more of depreciations than of appreciations of their local currencies against the US dollar.

Our study brings into light evidence of the important role of the Chinese renminbi in shaping the exchange rate behavior of a select group of East Asian currencies. Results obtained suggest that there is an additional dimension to the ‘fear of appreciation’ or ‘fear of floating-in-reverse’ behavior, initially coined by Levy-Yeyati and Sturzengger (2007) with regard to the experiences of this group of East Asian currencies. In particular, we find that there is a greater degree of aversion to appreciation of these East Asian currencies—specifically, the Philippine peso and the Thailand baht—against the Chinese renminbi than against the US dollar. This heightened fear of appreciation against the Chinese currency confirms that trade competition matters in this part of the world and that this fear to appreciate plays a central role in the exchange rate management of major East Asian currencies. As envisaged, the increasing role of China as a major trading hub in the region as well as globally, implies that the Chinese renminbi would exert a growing significant influence on other currencies in the region.

Asian central banks react more strongly to currency appreciations than depreciations and more to nominal effective exchange rates (NEERs) than to bilateral US dollar rates. This rationalizes the relative exchange rate stability and the sustained reserve accumulation in the region.

An old yet rarely explored motive of hoarding international reserves advanced by Machlup (1966) is examined. Reserve accumulation behavior in Asia is driven by a psychological desire to keep up with neighboring countries, i.e., ‘keeping up with the Joneses effect’.

It is a well-known stylized fact that the distributions of financial asset returns are non-normal and fat-tailed. In this study, we explore whether this stylized fact also applies to the log changes in house prices. Using house price indices data for 16 Organization for Economic Cooperation and Development countries, we find that there is an apparent tail-fatness in the empirical distribution of log changes in house prices. Furthermore, the Student's t provides an adequate fit for almost all the house price indices under consideration.

The key objective of this study is to show that two potential shortcomings of the Determinant of Change in Covariance (DCC) matrix procedure of Rigobon (2003), namely with the arbitrary determination of the windows, i.e. tranquil and crisis periods and the violation of its heteroscedasticity assumption under the null, can be simultaneously addressed via a simple incorporation of a Markov-switching vector autoregressive approach into the overall DCC procedure. To demonstrate this, we revisit the period around the time of the East Asian crises using daily stock exchange of Indonesia, Malaysia, Philippines, Thailand, Singapore, Korea, Hong Kong and Taiwan, and test whether there is a significant break or discontinuity in the stock exchange returns of the eight East Asian markets during crisis periods, especially around the time of the 1997 financial crises. In contrast to that of Rigobon (2003), our results show that the propagation of shocks shifted significantly starting with the onset of the sharp decline...

While most observers concur that the time is not ripe for Asia to consider a common currency, there has been some discussion about the possible creation of an Asian Currency Unit (ACU). This paper examines the specific issue of the ACU which, in a general sense, is a weighted average of regional currencies a la the European Currency Unit (ECU) which was created in March 1979 under the European Monetary System (EMS). The paper critically examines the rationale for the ACU proposal and offers an initial attempt at computing optimal currency composition of the ACU. The optimal basket weights computed are aimed at ensuring a regional currency basket that has minimal variance. Hence it will deliver stability in intra-regional exchange rates for alternative configurations of currency baskets in the Asian and Pacific region.

This study seeks to demonstrate that the identification of crisis episodes based on commonly applied exchange market pressure (EMP) indices, namely, Eichengreen, Rose and Wyplosz [Eichengreen, B., Rose, A., and Wyplosz, C., 1995, Exchange Market Mayhem: The Antecedents and Aftermaths of Speculative Attacks, Economic Policy 21 (October), 249–312.], Sachs, Tornell and Velasco [Sachs, J.D., Tornel, A., and Velasco, A., 1996, Financial Crises in Emerging Markets: The Lessons From 1995, Brooking Papers on Economic Activity 1, 147–215.], and Kaminsky, Lizondo and Reinhart [Kaminsky, G., Lizondo, S., and Reinhart, C., 1998, Leading Indicators of Currency Crises, IMF Staff Paper 45, 1 (March), 1–48.] are highly sensitive to the choice of: a) the weighting scheme for each component of the EMP index; and b) the statistical parametric assumption used in the constructions of crisis thresholds. To highlight further some of the potential consequences of these two pitfalls in identifying crisis episodes, this paper employs a number of possible alternative approaches to measure the exchange market pressure.

Early constructions of a single crisis index known as the exchange market pressure (EMP) index have largely been based on the fluctuations of the real or nominal exchange rate of a currency against the US dollar—the most commonly accepted anchor currency in the global market. Hardly any studies have however tested the sensitivity of this crisis index to the choice of different “anchor” currencies. To address this pertinent issue, our study considers the EMP indices of the Indonesian rupiah, Malaysian ringgit and Thailand baht constructed by adopting three different exchange rates—the real effective rate, the local currency against the US dollar, and the local currency against the Japanese yen for the period of 1985–2003. The test results indicate that the reported incidences of speculative attacks are highly sensitive to the choice of anchor currencies.

In this study, we examine the impact of the STAR highway located in Batangas province, Philippines, on the public finance of the cities and municipalities through which it directly passes. Specifically, we exploit a unique, disaggregated dataset on tax (property and business taxes) as well as non-tax revenues (regulatory fees and user charges) of the cities and municipalities in the Batangas province. We find, based on our two specifications of a modified difference-in-difference model, that the STAR highway had a robust, statistically significant, and economically growing impact on business taxes. We also find that this so-called “highway effect” also extends to municipalities located in a neighboring province to Batangas. Furthermore, based on more careful inspection and robustness checks, it appears that the STAR highway had a significant impact not only on business taxes, but also on property taxes and regulatory fees. These findings support the widely held belief that infrastructure investments matter; further, our micro-case study suggests that infrastructure investments can indirectly boost tax and non-tax revenues through their power to reduce transportation costs and enhance the activity of firms and workers located along the highway.

The key objective of this study is to bring into light several shortcomings of early literatures in identifying episodes of currency crises. A careful examination of the basic statistical distribution of exchange market pressure index, based on a weighting scheme proposed by Eichengreen–Rose–Wyplosz (1995, 1996), reveals that the conventional method of defining currency crisis is statistically flawed. This study applies an alternative statistical method known as Extreme Value Analysis (EVA), originally developed by Hill (1975), and, more recently, extended by Huisman et al. (2001) to the case of Singapore from 1985 to 2003.

The results highlight the conflicting interests of countries — to stabilize exchange rates or to keep the option of exchange rate depreciation in order to maintain competitiveness of domestic tradable producers. With deepening integration in East Asia, however, the desire for exchange rate stability will eventually outweigh the desire to maintain a protectionist tool. How extensive the pressures will be in East Asia will depend not only on how many countries seriously desire to be in the more integrated economic area in which Factory Asia operates, but also on their institutional and political readiness to commit in such schemes at the cost of renouncing an important policy instrument.

Developing economies are seeking to promote financial inclusion, i.e., greater access to financial services for low-income households and firms, as part of their overall strategies for economic and financial development. This raises the question of whether financial stability and financial inclusion are, broadly speaking, substitutes or complements. In other words, does the move toward greater financial inclusion tend to increase or decrease financial stability? A number of studies have suggested both positive and negative ways in which financial inclusion could affect financial stability, but very few empirical studies have been made of their relationship. This partly reflects the scarcity and relative newness of data on financial inclusion. This study contributes to the literature on this subject by estimating the effects of various measures of financial inclusion (together with some control variables) on some measures of financial stability, including bank non-performing loans and bank Z scores. We find some evidence that an increased share of lending to small and medium sized enterprises (SMEs) aids financial stability, mainly by reducing non-performing loans (NPLs) and the probability of default by financial institutions. This suggests that policy measures to increase financial inclusion, at least by SMEs, would have the side-benefit of contributing to financial stability as well.

With the rise of the People’s Republic of China (PRC) as the world’s largest trading nation (measured by trade value) and second largest economic power (measured by GDP), its economic influence over the neighboring emerging economies in East Asia has also risen. The PRC introduced some exchange rate flexibility in July 2005, and in the wake of the global financial crisis has been pursuing a policy to internationalize its currency, the renminbi (RMB). Clearly the exchange rate policy of the PRC has significant implications for exchange rate regimes in emerging East Asia. This paper examines the behavior of the RMB exchange rate and the impact of RMB movements on those of other currencies in emerging East Asia during the period 2000–2014. We apply the Frankel–Wei regression model to identify changes in the RMB exchange rate regime over time and a modified version of the model, developed by the authors in their earlier paper, to estimate the RMB weight in an emerging East Asian economy’s currency basket. We find that the US dollar continues to be the dominant anchor currency in the region, while the RMB has taken on increasing importance in the currency baskets of many East Asian economies in recent years. The paper also explores how monetary and currency cooperation—led by the PRC and Japan—can promote intra-East Asian exchange rate stability under the pressure of rising financial market openness in the PRC.

This paper examines whether the renminbi (RMB) has supplanted the US dollar as the major anchor currency in the currency baskets of East Asian economies. It systematically demonstrates that existing techniques to address the problem of severe multicollinearity in estimations of the Frankel¬–Wei regression model, with the movements in both the RMB and the US dollar included on the right-hand side of the equation, remain limited in providing stable and robust results. The paper proposes a simple modification of the Frankel–Wei regression model to estimate the RMB weight in an economy’s currency basket. Using this new approach, findings show there is not yet an RMB bloc in East Asia, contrary to claims made by some recent studies, with the US dollar continuing to be the dominant anchor currency in the region. The RMB has taken on some importance in the currency baskets of many East Asian economies in recent years and this appears to have occurred at the expense of the yen. In short, despite the rising importance of the RMB, it has not eclipsed the US dollar as the dominant anchor currency in East Asia.

This article employs the currency invariant index due to Hovanov et al. (2004) to construct an optimal or stable common G-3 currency basket across different groups of countries in East Asia. Calculated optimal weights show a larger weight for the US dollar but a nonnegligible role for the Japanese yen. The volatility of the optimal common G-3 currency basket is several times smaller than that of a similarly proposed common G-3 currency basket in East Asia.

The results highlight the conflicting interests of countries — to stabilize exchange rates or to keep the option of exchange rate depreciation in order to maintain competitiveness of domestic tradable producers. With deepening integration in East Asia, however, the desire for exchange rate stability will eventually outweigh the desire to maintain a protectionist tool. How extensive the pressures will be in East Asia will depend not only on how many countries seriously desire to be in the more integrated economic area in which Factory Asia operates, but also on their institutional and political readiness to commit in such schemes at the cost of renouncing an important policy instrument.

The purpose of this study is to better understand the likely impact on Asian economies and financial institutions of various recent global financial reforms, including Basel III capital adequacy and liquidity rules. Part one reviews the lessons of the global financial crisis (GFC) of 2007–09 and their relevance for Asian economies. Part two describes the major regulatory reforms that have been announced and possible concerns about their impacts on emerging economies. Part three reviews the literature aimed at quantifying the impacts of Basel III capital adequacy rules. Part four develops our methodology and analysis of the quantitative impact of Basel III capital adequacy rules on a panel of Southeast Asian financial institutions with emphasis on the effect on economic growth. Finally, the study concludes with a discussion on the policy implications of the results obtained from the previous section for Asian financial sectors and economies. Overall, we find that the Basel III capital adequacy rules are likely to have limited impacts on economic growth in Asia, but other financial regulations, including liquidity standards and rules for over-the-counter (OTC) derivatives, could have stunting effects on financial development in the region.

An Asian Currency Unit (ACU) index is constructed using an alternative procedure which minimizes a basket or portfolio of assets expressed in terms of national currencies. Using this estimated ACU index and an ACU Deviation Indicator, the main finding of this study based on the current trajectory of East Asian currencies relative to this regional ACU average or benchmark is that there is a formation of two contrasting groups of countries in the region—one a group of strong currencies and the other a group of weak currencies. We emphasize that the implication of this contrasting trajectory in East Asian intra-regional exchange rates is to disturb the competitive trading relationships in the region which may result in wasteful beggar-thyneighbor policies in the region. As emphasized by other recent studies, e.g., Kawai and Takagi (2012), the region needs a kind of framework for exchange rate policy coordination that will promote intra-regional exchange rate stability. We suggest several ways in which the region can capitalize on using this ACU index in the immediate term for surveillance purposes, particularly, for purposes of assessing “over- and undervaluation†of the individual currencies from the regional ACU average and for flagging emerging vulnerabilities in individual economies in the region.

The objective of our paper is to provide an empirical platform to the debate on the macroeconomic consequences of large currency appreciations. Observing the experiences of six major Asian economies (the ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand and Singapore) and Korea) during the past two decades, the primary aim of this study is to ascertain the consequences of strong currencies, on the one hand, and reserves accumulation, on the other, for a set of vital macroeconomic indicators, namely, exports, growth and price. We then deal squarely, in retrospect, with the question of whether there is any justification to the so-called fear of appreciation phenomenon among the policy makers of these Asian economies.

The possible crucial role of international bank lending in the transmission of adverse economic disturbance from advanced economies to emerging economies in the recent global financial crisis has once again placed this type of capital flows into sharper scrutiny both in academic and policy discussions. We construct macro-and micro-panel data on international bank lending to six Asian economies, viz., Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand, to analyze a number of objectives. We first examine the influence of a number of critical determinants not only to overall international bank lending but also to cross-border bank lending, and obtained one critical finding in this part of the study that cross-border lending by international banks tend to pull-out from host economies during difficult times in source economies, whereas such retrenchment are not evident on an aggregated basis. This may suggest that encouraging brick-and-mortar affiliates of international banks to ‘set up shop’ in recipient economies may be the judicious choice for these economies. We next critically examine the difference between subsidiaries and branches of international banks in terms of their ability to shield themselves from the financial difficulties of their global parent banks and thus their ability to continue lending in destination markets. According to our results, foreign bank subsidiaries are more capable in this regard. This finding carries with it the obvious attraction of favouring an organizational banking structure that is biased towards subsidiaries. However, national banking regulators should remember that apart from encouraging a host of other domestic and cross-border initiatives, encouraging the entry of brick-and mortar subsidiaries of international banks should not viewed as a panacea to the financial stability concerns not only in Asia but also across emerging markets in general.

Taiwan is among the world's largest holders of international reserves, having accumulated US $350 billion of foreign exchange as of end 2009. Despite its significance, since it is not a member of the IMF, Taiwan has been relatively under-studied compared to many of its other Asian counterparts. As such, the aim of this paper is to shed a little light on Taiwan's exchange rate policies and strategies. Our results reveal a regime that can be characterized as involving some degree of management of the New Taiwanese dollar (NTD). More significantly, we can confirm the existence of an asymmetry in central bank foreign exchange intervention responses to currency appreciations versus depreciations in Taiwan, particularly in the case of nominal effective exchange rates (NEERs). This in turn rationalizes the relative exchange rate stability as well as the sustained reserve accumulation in Taiwan. Refereed/Peer-reviewed

While most observers concur that the time is not ripe for Asia to consider a common currency, there has been some discussion about the possible creation of an Asian Currency Unit (ACU).2 This chapter examines the specific issue of the ACU which, in a general sense, is a weighted average of regional currencies a la the European Currency Unit (ECU) which was created in March 1979 under the European Monetary System (EMS) and remained in operation until the launch of the euro in January 1999.3 The remainder of the chapter is as follows. Section 11.2 provides a critical overview of and rationale for the ACU proposal. Section 11.3 offers an initial attempt at computing optimal currency compositions of the ACU based on the methodology developed by Hovanov, Kolari and Sokolov (2004). This methodology develops basket weights in the context of a minimized basket or portfolio of assets expressed in terms of national currencies. The final section offers a few concluding remarks.

Preface and Introduction Acknowledgements PART I: EXCHANGE RATES AND MACROECONOMIC CONSEQUENCES Managing the Liquidity Effects of Reserve Stockpiling in Emerging Asia A.Ouyang & T.Willett What is the Impact of Exchange Rate Changes on inflation in Asia? A.Ghosh A Closer Examination of Exchange Rate Pass-through in Korea and Thailand A.Ghosh PART II: IMPACT OF CURRENCY CRISIS AND MONETARY POLICY Are Crisis-Induced Devaluations Contractionary? If So,Why? S.Chung-Hua Financial Crisis, Capital Outflows and Monetary Policy Responses: Simple Analytics with Reference to East Asia Understanding Currency Crisis and Monetary Policy Responses in Emerging Economies M.Paraulkar How to Manage New-Style Currency Crises? Can High Reserves Offset Weak Fundamentals? J.Li PART III: MONETARY AND FINANCIAL COOPERATION IN ASIA Examining the Case for a Regional Reserve Pool R.Siregar & G.Bird Taking Stock of Monetary and Financial Cooperation in Asia Is there a Role for an Asian Currency Unit (ACU)? V.Pontines

The key objective of this study is to show that two potential shortcomings of the Determinant of Change in Covariance Matrix (DCC) procedure of Rigobon (2003), namely with the arbitrary determination of the windows, i.e., tranquil and crisis periods and the violation of its heteroscedasticity assumption under the null, can be simultaneously addressed via a simple incorporation of a Markov-Switching Vector Autoregressive (MS-VAR) approach into the overall DCC procedure. To demonstrate this, we revisit the period around the time of the East Asian crises using daily stock exchange of Indonesia, Malaysia, Philippines, Thailand, Singapore, Korea, Hong Kong and Taiwan and test whether there is a significant break or discontinuity in the stock exchange returns of the eight East Asian markets during crisis periods, especially around the time of the 1997 financial crises. In contrast to that of Rigobon (2003), our results show that the propagation of shocks shifted significantly starting with the onset of the sharp decline in the Hong Kong stock market.

This study seeks to demonstrate that the identification of crisis episodes based on commonly applied exchange market pressure (EMP) indices, namely, Eichengreen, Rose and Wyplosz (1995), Sachs, Tornell and Velasco (1996), and Kaminsky, Lizondo and Reinhart (1998) are highly sensitive to the choice of: a) the weighting scheme for each component of the EMP index; and b) the statistical parametric assumption used in the constructions of crisis thresholds. To highlight further some of the potential consequences of these two pitfalls in identifying crisis episodes, this paper employs a number of possible alternative approaches to measure the exchange market pressure.

By examining exchange market intervention activities of the monetary authority of each country, we revisit an old debate on whether crisis-effected countries in East Asia, namely Indonesia, Korea, Singapore and Thailand, have gone back to their pre-1997 rigid exchange rate policies, or, instead, have they actually moved to a more flexible regime? More importantly, if indeed there has been a shift from a rigid to a more flexible one, was the move a voluntary one, or mainly due to the presence of high market pressures on the currency? Given the absence of publicly available information on intervention in the foreign exchange market during the observation period, we propose an index of central bank intervention activity in the exchange market that also includes overnight market rates. Apart from applying the Markov switching ARCH and the extreme value theory methodologies to the construction of the index, thresholds of exchange rate regimes are also generated and utilized to systematically classify the types of exchange rate regimes that these East Asian countries adopted during the post-1997 financial crisis.

The accumulations of foreign debts had indeed been at a rapid phase, particularly during the last few years leading to the outbreak of the 1997 financial crises in the four most severely effected economies, namely Indonesia, the Philippines, Thailand and Korea. Interestingly, during the same period, the rates of overshooting of these East Asian currencies have also been found to increase considerably. The objective of this paper is to evaluate whether the rapid accumulation of external debts, especially since 1994, has contributed to the overshooting of the East Asian countries’ currencies starting late 1997.

The accumulations of foreign debts had indeed been at a rapid phase, particularly during the last few years leading to the outbreak of the 1997 financial crises in the four most severely effected economies, namely Indonesia, the Philippines, Thailand and Korea. Interestingly, during the same period, the rates of overshooting of these East Asian currencies have also been found to increase considerably. The objective of this paper is to evaluate whether the rapid accumulation of external debts, especially since 1994, has contributed to the overshooting of the East Asian countries' currencies starting late 1997.

The objective of this study is to identify and date the episodes of high speculative attack periods against the Indonesian rupiah over the last fifteen years (i.e. from 1985 to 2003). From the findings, we hope to address the following set of questions. Had rupiah indeed been stable prior to its meltdown in the third quarter 1997? Arguably a more relevant question to be addressed at this point is whether the rupiah has stabilized, as measured by a relatively moderate EMP index, since its worst fall in late 1997? This study also hopes to introduce a simple measurement index to detect the presence of market pressures in the foreign exchange market, and to illustrate a reliable methodology to estimate a “threshold” separating low market pressures from the extreme ones.

The objective of this study is to identify and date the episodes of high speculative attack periods against the Indonesian rupiah over the last fifteen years (i.e. from 1985 to 2003). From the findings, we hope to address the following set of questions. Had rupiah indeed been stable prior to its meltdown in the third quarter 1997? Arguably a more relevant question to be addressed at this point is whether the rupiah has stabilized, as measured by a relatively moderate EMP index, since its worst fall in late 1997? This study also hopes to introduce a simple measurement index to detect the presence of market pressures in the foreign exchange market, and to illustrate a reliable methodology to estimate a ''threshold'' separating low market pressures from the extreme ones.

Early constructions of a single crisis index known as the exchange market pressure (EMP) index have largely been based on the fluctuations of the real or nominal exchange rate of a currency against the US dollar ---the most commonly accepted anchor currency in the global market. Hardly any studies have however tested the sensitivity of this crisis index to the choice of “the anchor” currency. To address this pertinent issue, our study considers the case of Thailand for the period of 1985 to 2003. The test results indicate that the EMP index of the baht / the US dollar rate reported substantially less number of speculative attacks against the baht than that reported by the EMP index of the baht / the Japanese yen rate.

A common feature of numerous studies on early warning systems (EWS) of currency crisis is the use of an index of exchange market pressure, defined as a weighted average of the rate of depreciation, the monthly percentage changes in international reserves, and sometimes the inclusion of the monthly change in the interest rate, in order to identify and proxy the occurrence of currency crisis. Crucial to this approach is the appropriate definition of a currency crisis, and the literature has usually defined currency crisis occurring when the measure of exchange market pressure exceeds a certain threshold. The main theme of the paper is that not only is the use of a threshold in defining currency crisis as arbitrary, but a much more careful examination of the basic statistical distribution of the measures of exchange market pressure will reveal that the conventional method of defining currency crisis is statistically flawed or inaccurate in capturing the 'true' dispersion of any given exchange market pressure series. This study applies an alternative statistical method known as Extreme Value Analysis (EVA) to three different weighting schemes popularly adopted in the literature in constructing exchange market pressure indexes, namely the Eichengreen-Rose-Wyplosz (ERW), the Sachs-Tornell-Velasco (STV) and the Kaminsky-Lizondo-Reinhart (KLR). The application of EVA leads to more incidences of currency crises being identified or 'captured' compared to the conventional method across a number of countries in East Asia and Latin America from 1985 to 2003