This paper examines whether forming an optimum currency area (OCA) is viable for the East Asian r... more This paper examines whether forming an optimum currency area (OCA) is viable for the East Asian region by testing the symmetry of underlying structural shocks. A structural vector autoregression (VAR) method is used to identify the underlying shocks and to examine the correlation in shocks for specified sample periods. Decomposition of the variance of shocks and impulse response analysis are used to examine the size and the speed of adjustments to shocks. The results imply that some sub-regions are potential candidates for forming OCAs, as their shocks are correlated and small, and the economies adjust rapidly to such shocks.
This paper investigates the relationship between Japanese firms' exposure to the exchange rate ri... more This paper investigates the relationship between Japanese firms' exposure to the exchange rate risk and risk management, such as choice of invoicing currency, and financial and operational hedges. The firm's exposure to the exchange rate risk is estimated by co-movements of the stock prices and exchange rates, following Dominguez (1998) and others. Data on risk management measures-financial and operational hedging, the choice of invoice currency and the price revision strategy (pass-through)-were collected from a questionnaire survey covering all Tokyo Stock Exchange listed firms in 2009. Results show the following: First, firms with greater dependency on sales in foreign markets have greater foreign exchange exposure. Second, the higher the US dollar invoicing share, the greater is the foreign exchange exposure -however, risk is reduced by both financial and operational hedging. Third, yen invoicing reduces foreign exchange exposure. These findings indicate that Japanese firms use a combination of risk management tools to mitigate the degree of exchange rate risk.
Recovering from the severe economic downturn during the currency crisis, East Asian countries hav... more Recovering from the severe economic downturn during the currency crisis, East Asian countries have shown considerable economic growth again and regional integration appears to be accelerating. Such a deepening integration process recalls to us an interesting question as to whether a regional monetary union or a common currency unit can be established in East Asia. While the ongoing economic integration suggests the feasibility of regional monetary arrangements, a rigorous empirical investigation of this issue will be very necessary. In this paper we employ a structural VAR model with block exogeneity to comparatively investigate if external shocks originated from the US play a dominant role in influencing the macroeconomic fluctuations in East Asia during the sample period from 1978 to 2007. Our results indicate that the real output variable and inflation rate are highly correlated and statistically significant among the Asian NIEs and during both the whole sample period and the period after the financial crisis. The US real output growth was correlated significantly with that in Japan, Taiwan, Malaysia and Thailand during the period 1978-1987, but maintained significant correlation only with that of Hong Kong, Singapore and Taiwan during the post-crisis period. The real GDP growth in Japan has a significant correlation with the Asian NIEs and China during the post-crisis period, while the latter has only one significant correlation. This finding is consistent with the results from the correlation analysis of structural shocks using the conventional technique. The results from the structural VAR model with block exogeneity show that the US shock and the Japanese shock are the dominant sources of disturbance in the region before the financial crisis, especially during the 1978-1987 period, both in terms of short run and long run, During the post-crisis period, it is found that the US shock has become the dominant source of the disturbance in most economies with the exception of the Chinese economy, while the Japanese influence has become decreased. The Chinese shock influence shows an increasing trend over time, but the size is still small and not compatible with that of the US shock. The world oil price shock has become increasingly important in influencing the stability of the real output growth in the region, most notably in the economies of China, Hong Kong, Singapore and Thailand. This indicates their increasing reliance on the world oil supply associated with their industrialization. The results also indicate that most of the East Asian economies have positive impulse responses to the external shocks originated from the United States through the different time periods, with the only exception of Indonesia during the postcrisis period. The impulse responses to the regional shock originated from China and Japan show an increasing trend, especially during the post crisis period, but the sizes are smaller and not compatible with that of the United States in all the time horizons. These findings imply that even though the regional integration appears to be deepening and accelerating especially after the recent financial crisis, the influence of the US shock is still playing a dominant role in real output fluctuations in the East Asian region. It is often pointed out that Japanese firms have been building a production network in East Asia through trade and investment, and also that China has grown rapidly and become a candidate of a regional key country. However, our result implies that the US influence in the region is still asymmetric and strong, and it is hard to conclude that shocks to the East Asian economies have become more regionally originated.
This paper examines the viability of regional monetary integration in East Asia by focusing on th... more This paper examines the viability of regional monetary integration in East Asia by focusing on the symmetry of shocks, one of the preconditions for forming an optimum currency area (OCA). We extend the conventional 2-variable structural VAR model by incorporating foreign (specifically, US) variables, as well as real effective exchange rates to capture country-specific shocks in our estimation. We also provide similar estimates for European countries to test for robustness. Impulse response function analysis is conducted to measure the size of shocks and the speed of adjustment to shocks. The empirical results reveal that it is less feasible for the East Asian economies to form an OCA than suggested in previous studies, whereas only small sub-groups are potential candidates for a currency arrangement.
We estimate the equilibrium exchange rate (EER) of the Chinese renminbi (RMB) vis-à-vis the U.S. ... more We estimate the equilibrium exchange rate (EER) of the Chinese renminbi (RMB) vis-à-vis the U.S. dollar from 1992 to 20098. In contrast to the recent empirical studies on the EER employing a large cross-country analysis, we focus on the supply side real factors in estimating the EER by extending the Yoshikawa (1990) model. To better reflect China's processing exports in the context of growing intra-regional trade in Asia, we incorporate in the empirical analysis the source country breakdown data on import prices and input coefficients of intermediate inputs by constructing an annual new International Input-Output (IIO) table for the period from 1992 to 20098. The results show that the EER of Chinese RMB appreciates sharply from 2005 to 20098, suggesting that the current RMB exchange rate has been substantially undervalued and should be revalued by 4665 percent as of 2009 compared tofrom the year 20004 level. Such sharp appreciation of the EER corresponds to the dramatic increase in China's current account surplus from the mid-2000s, especially against the United States, which is ascribed to the significant improvement of both labor and intermediate input coefficients in China. JEL Classification: F31, F33, F15
... In the core countries, symmetric demand shocks prevail and the significance of correlations i... more ... In the core countries, symmetric demand shocks prevail and the significance of correlations is high, reflecting their close macroeconomic policy coordination. ... Is the European union a national currency area, or is it held together by policy makers?. ...
This paper examines the viability of regional monetary integration in East Asia by focusing on th... more This paper examines the viability of regional monetary integration in East Asia by focusing on the symmetry of shocks, which is one of the preconditions for forming an optimum currency area (OCA). We extend the conventional 2-variable structural VAR model by incorporating foreign (namely, US) variables, as well as real effective exchange rates to capture country-specific shocks in estimation. We also obtain similar estimates for European countries to check for robustness. Impulse response function analysis is conducted to measure the size of shocks and the speed of adjustment to shocks. The empirical results reveal that it is less feasible for East Asian economies to form an OCA than is suggested in previous studies, but they do imply that some sub-groups of the economies, such as some Asian NIEs and ASEAN economies, are more appropriate candidates as their underlying shocks are correlated and symmetric, and the speed of their adjustment to shocks is faster JEL Classification: F31, F33, F36, F41
Exxon Mobil and ConocoPhillips stock price has been predicted using the difference between core a... more Exxon Mobil and ConocoPhillips stock price has been predicted using the difference between core and headline CPI in the United States. Linear trends in the CPI difference allow accurate prediction of the prices at a five to ten-year horizon.
It has been a hot debit whether a monetary union is feasible in the East Asian region. Most of th... more It has been a hot debit whether a monetary union is feasible in the East Asian region. Most of the existing studies focus on the symmetric issue of the fundamental shocks and the extent of correlation by applying the structural vector autoregression (VAR) technique, which includes the first-differenced variables in the model and examines only the bilateral relationship. However, the shock symmetry does not necessarily mean the co-movements of the real output variables (common business cycles) between the countries concerned. The present paper employs the Johansen (1988) cointegration test to check the long-run co-movements of real outputs and also conducts the Vahid and Engle (1993) common feature test to detect the short-term common business cycles. The novelty of this paper is twofold. First, whereas the structural VAR approach considers shocks correlation bilaterally, we use a multivariate VAR framework to allow for the relationships within a specific group of countries. Second, we employ the cointegration technique to examine both the long-run and the short-run dynamics of the real variables to determine the suitability and costs of forming a monetary union in the region. JEL classification: E32; F36; F41
The East Asian region has experienced astonishing economic growth and integration over the past f... more The East Asian region has experienced astonishing economic growth and integration over the past few decades. It is generally believed that a high degree of integration in the region would greatly shape the economic structure of each individual economy and has direct implications for the effectiveness of domestic stabilisation policy and policy coordination. This paper empirically examines the feasibility of forming a monetary union in East Asia by assessing the real output co-movements among these economies. As suggested by the optimum currency area (OCA) theory that losing monetary independence would be the major cost for adopting a common currency, it would be less costly for the economies to form a monetary union if the business cycles are synchronised across countries. Cointegration test and the Vahid and Engle (1993) test for common business cycles are conducted to examine their long-run relationship and short-run interactions in real outputs, respectively. Our study found that some pair countries in the region share both the long-run and short-run synchronous movements of the real outputs. In particular, the short-run common business cycles are found in some pairs of ASEAN economies consisting of Singapore, Thailand and Indonesia, and in the Northeast Asian region consisting of Hong Kong, Korea and Mainland China, as well as between Japan and Taiwan. These findings have important implications for the economies in terms of adjustment costs when considering the adoption of a monetary union.
The paper attempts to evaluate the prospect of creating a currency union in the "Greater China" e... more The paper attempts to evaluate the prospect of creating a currency union in the "Greater China" economic area including Mainland China, Hong Kong and Taiwan. Despite of the political deadlock and military confrontation in the Taiwan Strait, the Greater China area has experienced rapid and spontaneous regional integration in the past decades as a result of increasingly cross-border trade, foreign direct investment (FDI), technology contracts, and other arrangements in accordance with changes in comparative advantage and industrial upgrading in these economies. In this study, we focus on the symmetry in shocks that is perceived as one of the major preconditions of a currency union. In contrast to the previous studies, we investigate the time-varying correlation of supply and demand shocks by using the Kalman filter technique in order to reveal whether the Greater China economies show a convergence trend. We also examine the costs of forming a currency union in the area that are caused by the loss of monetary autonomy in each economy. Our results emphasize an increasing symmetry in demand shocks and, to a lesser extent, in supply shocks, implying that these economies would not suffer too much from abandoning their monetary policy as an instrument of absorbing shocks.
This paper examines whether forming an optimum currency area (OCA) is viable for the East Asian r... more This paper examines whether forming an optimum currency area (OCA) is viable for the East Asian region by testing the symmetry of underlying structural shocks. A structural vector autoregression (VAR) method is used to identify the underlying shocks and to examine the correlation in shocks for specified sample periods. Decomposition of the variance of shocks and impulse response analysis are used to examine the size and the speed of adjustments to shocks. The results imply that some sub-regions are potential candidates for forming OCAs, as their shocks are correlated and small, and the economies adjust rapidly to such shocks.
This paper investigates the relationship between Japanese firms' exposure to the exchange rate ri... more This paper investigates the relationship between Japanese firms' exposure to the exchange rate risk and risk management, such as choice of invoicing currency, and financial and operational hedges. The firm's exposure to the exchange rate risk is estimated by co-movements of the stock prices and exchange rates, following Dominguez (1998) and others. Data on risk management measures-financial and operational hedging, the choice of invoice currency and the price revision strategy (pass-through)-were collected from a questionnaire survey covering all Tokyo Stock Exchange listed firms in 2009. Results show the following: First, firms with greater dependency on sales in foreign markets have greater foreign exchange exposure. Second, the higher the US dollar invoicing share, the greater is the foreign exchange exposure -however, risk is reduced by both financial and operational hedging. Third, yen invoicing reduces foreign exchange exposure. These findings indicate that Japanese firms use a combination of risk management tools to mitigate the degree of exchange rate risk.
Recovering from the severe economic downturn during the currency crisis, East Asian countries hav... more Recovering from the severe economic downturn during the currency crisis, East Asian countries have shown considerable economic growth again and regional integration appears to be accelerating. Such a deepening integration process recalls to us an interesting question as to whether a regional monetary union or a common currency unit can be established in East Asia. While the ongoing economic integration suggests the feasibility of regional monetary arrangements, a rigorous empirical investigation of this issue will be very necessary. In this paper we employ a structural VAR model with block exogeneity to comparatively investigate if external shocks originated from the US play a dominant role in influencing the macroeconomic fluctuations in East Asia during the sample period from 1978 to 2007. Our results indicate that the real output variable and inflation rate are highly correlated and statistically significant among the Asian NIEs and during both the whole sample period and the period after the financial crisis. The US real output growth was correlated significantly with that in Japan, Taiwan, Malaysia and Thailand during the period 1978-1987, but maintained significant correlation only with that of Hong Kong, Singapore and Taiwan during the post-crisis period. The real GDP growth in Japan has a significant correlation with the Asian NIEs and China during the post-crisis period, while the latter has only one significant correlation. This finding is consistent with the results from the correlation analysis of structural shocks using the conventional technique. The results from the structural VAR model with block exogeneity show that the US shock and the Japanese shock are the dominant sources of disturbance in the region before the financial crisis, especially during the 1978-1987 period, both in terms of short run and long run, During the post-crisis period, it is found that the US shock has become the dominant source of the disturbance in most economies with the exception of the Chinese economy, while the Japanese influence has become decreased. The Chinese shock influence shows an increasing trend over time, but the size is still small and not compatible with that of the US shock. The world oil price shock has become increasingly important in influencing the stability of the real output growth in the region, most notably in the economies of China, Hong Kong, Singapore and Thailand. This indicates their increasing reliance on the world oil supply associated with their industrialization. The results also indicate that most of the East Asian economies have positive impulse responses to the external shocks originated from the United States through the different time periods, with the only exception of Indonesia during the postcrisis period. The impulse responses to the regional shock originated from China and Japan show an increasing trend, especially during the post crisis period, but the sizes are smaller and not compatible with that of the United States in all the time horizons. These findings imply that even though the regional integration appears to be deepening and accelerating especially after the recent financial crisis, the influence of the US shock is still playing a dominant role in real output fluctuations in the East Asian region. It is often pointed out that Japanese firms have been building a production network in East Asia through trade and investment, and also that China has grown rapidly and become a candidate of a regional key country. However, our result implies that the US influence in the region is still asymmetric and strong, and it is hard to conclude that shocks to the East Asian economies have become more regionally originated.
This paper examines the viability of regional monetary integration in East Asia by focusing on th... more This paper examines the viability of regional monetary integration in East Asia by focusing on the symmetry of shocks, one of the preconditions for forming an optimum currency area (OCA). We extend the conventional 2-variable structural VAR model by incorporating foreign (specifically, US) variables, as well as real effective exchange rates to capture country-specific shocks in our estimation. We also provide similar estimates for European countries to test for robustness. Impulse response function analysis is conducted to measure the size of shocks and the speed of adjustment to shocks. The empirical results reveal that it is less feasible for the East Asian economies to form an OCA than suggested in previous studies, whereas only small sub-groups are potential candidates for a currency arrangement.
We estimate the equilibrium exchange rate (EER) of the Chinese renminbi (RMB) vis-à-vis the U.S. ... more We estimate the equilibrium exchange rate (EER) of the Chinese renminbi (RMB) vis-à-vis the U.S. dollar from 1992 to 20098. In contrast to the recent empirical studies on the EER employing a large cross-country analysis, we focus on the supply side real factors in estimating the EER by extending the Yoshikawa (1990) model. To better reflect China's processing exports in the context of growing intra-regional trade in Asia, we incorporate in the empirical analysis the source country breakdown data on import prices and input coefficients of intermediate inputs by constructing an annual new International Input-Output (IIO) table for the period from 1992 to 20098. The results show that the EER of Chinese RMB appreciates sharply from 2005 to 20098, suggesting that the current RMB exchange rate has been substantially undervalued and should be revalued by 4665 percent as of 2009 compared tofrom the year 20004 level. Such sharp appreciation of the EER corresponds to the dramatic increase in China's current account surplus from the mid-2000s, especially against the United States, which is ascribed to the significant improvement of both labor and intermediate input coefficients in China. JEL Classification: F31, F33, F15
... In the core countries, symmetric demand shocks prevail and the significance of correlations i... more ... In the core countries, symmetric demand shocks prevail and the significance of correlations is high, reflecting their close macroeconomic policy coordination. ... Is the European union a national currency area, or is it held together by policy makers?. ...
This paper examines the viability of regional monetary integration in East Asia by focusing on th... more This paper examines the viability of regional monetary integration in East Asia by focusing on the symmetry of shocks, which is one of the preconditions for forming an optimum currency area (OCA). We extend the conventional 2-variable structural VAR model by incorporating foreign (namely, US) variables, as well as real effective exchange rates to capture country-specific shocks in estimation. We also obtain similar estimates for European countries to check for robustness. Impulse response function analysis is conducted to measure the size of shocks and the speed of adjustment to shocks. The empirical results reveal that it is less feasible for East Asian economies to form an OCA than is suggested in previous studies, but they do imply that some sub-groups of the economies, such as some Asian NIEs and ASEAN economies, are more appropriate candidates as their underlying shocks are correlated and symmetric, and the speed of their adjustment to shocks is faster JEL Classification: F31, F33, F36, F41
Exxon Mobil and ConocoPhillips stock price has been predicted using the difference between core a... more Exxon Mobil and ConocoPhillips stock price has been predicted using the difference between core and headline CPI in the United States. Linear trends in the CPI difference allow accurate prediction of the prices at a five to ten-year horizon.
It has been a hot debit whether a monetary union is feasible in the East Asian region. Most of th... more It has been a hot debit whether a monetary union is feasible in the East Asian region. Most of the existing studies focus on the symmetric issue of the fundamental shocks and the extent of correlation by applying the structural vector autoregression (VAR) technique, which includes the first-differenced variables in the model and examines only the bilateral relationship. However, the shock symmetry does not necessarily mean the co-movements of the real output variables (common business cycles) between the countries concerned. The present paper employs the Johansen (1988) cointegration test to check the long-run co-movements of real outputs and also conducts the Vahid and Engle (1993) common feature test to detect the short-term common business cycles. The novelty of this paper is twofold. First, whereas the structural VAR approach considers shocks correlation bilaterally, we use a multivariate VAR framework to allow for the relationships within a specific group of countries. Second, we employ the cointegration technique to examine both the long-run and the short-run dynamics of the real variables to determine the suitability and costs of forming a monetary union in the region. JEL classification: E32; F36; F41
The East Asian region has experienced astonishing economic growth and integration over the past f... more The East Asian region has experienced astonishing economic growth and integration over the past few decades. It is generally believed that a high degree of integration in the region would greatly shape the economic structure of each individual economy and has direct implications for the effectiveness of domestic stabilisation policy and policy coordination. This paper empirically examines the feasibility of forming a monetary union in East Asia by assessing the real output co-movements among these economies. As suggested by the optimum currency area (OCA) theory that losing monetary independence would be the major cost for adopting a common currency, it would be less costly for the economies to form a monetary union if the business cycles are synchronised across countries. Cointegration test and the Vahid and Engle (1993) test for common business cycles are conducted to examine their long-run relationship and short-run interactions in real outputs, respectively. Our study found that some pair countries in the region share both the long-run and short-run synchronous movements of the real outputs. In particular, the short-run common business cycles are found in some pairs of ASEAN economies consisting of Singapore, Thailand and Indonesia, and in the Northeast Asian region consisting of Hong Kong, Korea and Mainland China, as well as between Japan and Taiwan. These findings have important implications for the economies in terms of adjustment costs when considering the adoption of a monetary union.
The paper attempts to evaluate the prospect of creating a currency union in the "Greater China" e... more The paper attempts to evaluate the prospect of creating a currency union in the "Greater China" economic area including Mainland China, Hong Kong and Taiwan. Despite of the political deadlock and military confrontation in the Taiwan Strait, the Greater China area has experienced rapid and spontaneous regional integration in the past decades as a result of increasingly cross-border trade, foreign direct investment (FDI), technology contracts, and other arrangements in accordance with changes in comparative advantage and industrial upgrading in these economies. In this study, we focus on the symmetry in shocks that is perceived as one of the major preconditions of a currency union. In contrast to the previous studies, we investigate the time-varying correlation of supply and demand shocks by using the Kalman filter technique in order to reveal whether the Greater China economies show a convergence trend. We also examine the costs of forming a currency union in the area that are caused by the loss of monetary autonomy in each economy. Our results emphasize an increasing symmetry in demand shocks and, to a lesser extent, in supply shocks, implying that these economies would not suffer too much from abandoning their monetary policy as an instrument of absorbing shocks.
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Papers by Kiyotaka Sato