Equilibrium Exchange Rates in Asian Currencies

Tsutomu Miyagawa ; Hideki Toya ; Tatsuji Makino

Faculty of Economics, Gakushuin University, 1-5-1, Mejiro, Toshima-ku, Tokyo 171-8588, Japan, Tel: +81-03-5992-2257 tsutomu.miyagawa @gakushuin.ac.jp
Faculty of Economics, Nagoya City University, 1, Yamanohata, Mizuho-cho, Mizuho-ku, Nagoya 467-8501, Japan, Tel: +81-052-872-5737 toya@econ.nagoya-cu.ac.jp
Institute of Economic Research, Hitotsubashi University, 2-1 Naka, Kunitachi, Tokyo 186-8603, Japan, Tel: +81-042-580-8330 makino@ier.hit-u.ac.jp

JEL Classification: F31, F40, L60, O53

Abstract

In this paper, we measured the equilibrium exchange rates (EER) for Asian currencies (baht, new Taiwan dollar, won, yen, and yuan) and the U.S. dollar. We compared the equilibrium exchange rates reflecting economic fundamentals with the actual exchange rate, and examined which factors affect the movement of equilibrium exchange rates. Our study shows that rapid increases of labor productivity in Korea and China have prevented an excessive depreciation of the won and yuan. When we take multilateral trade into account, the effective exchange rate of the yen was undervalued compared with the effective equilibrium exchange rate in 2000.

Keywords:

Asian currency crisis, Equilibrium exchange rate, Hollowing out of industry, Productivity differences, Purchasing power parity

Acknowledgments

respectively. This paper was presented at the Japan/Korea Industrial Workshop held at Seoul National University on December 21 2004. We thank Professors Soyoung Kim, Hak K. Pyo, and Kyoji Fukao for valuable comments. We are also grateful for the many comments to the Japanese version of the paper we received at several seminars and workshops. In particular, comments from Professors Fumiharu Mieno and Eiji Ogawa were invaluable to the revision of our paper. Professor Dequiang Liu and Dr. Keisuke Orii kindly provided us with the data for China and Thailand. This project was supported by the Japan Economic Research Institute, Grants-in-aid No. 12124202, No. 14203001, No. 15330043, and by the Hi-Stat project of Hitotsubashi University (COE program) financed by the Japanese Ministry of Education, Culture, Sports, and Science and Technology. All remaining errors are the responsibility of the authors.

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