East Asian Value Chains, Exchange Rates, and Regional Exchange Rate Arrangements

Willem Thorbecke

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: Tariffs and trade wars threaten East Asian economies. Exchange rate appreciations would be less disruptive than protectionism. This paper reports dynamic ordinary least squares findings indicating that appreciations in Asian supply chain countries reduce exports and increase imports. However, despite large current account surpluses, there has been little exchange rate appreciation outside of China. Modified Frankel-Wei (1994) regressions indicate that Asian countries focus on the U.S. dollar in their implicit currency baskets. These high weights on the dollar imply that regional exchange rates are in a Nash Equilibrium. No Asian country wants its exchange rate to appreciate against the dollar for fear of losing price competitiveness relative to its neighbors. A better equilibrium would occur if they assigned more weight to regional currencies and less to the dollar. This would facilitate a concerted appreciation of Asian currencies against the dollar.

Pages: 31 pages
Date: 2019-06
New Economics Papers: this item is included in nep-cna, nep-int, nep-mon, nep-opm and nep-sea
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Citations: View citations in EconPapers (9)

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Journal Article: East Asian value chains, exchange rates, and regional exchange rate arrangements (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eti:dpaper:19046

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