Global Financial Crisis and
Regional Monetary Cooperation in East Asia
Hitotsubashi University and RIETI
Eiji Ogawa
8/29/2009
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Contents
• From global imbalances to global financial
crisis
• Empirical analysis on appreciation of East
Asian currencies for reducing the current
account imbalances
• Scenarios of US dollar depreciation
• Asymmetric reaction of East Asian currencies
• Regional monetary cooperation in East Asia
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Global Imbalances
•
Global Imbalances (current account imbalances across
the world)
(1) Current account (CA) deficit in the United States (US)
(<= increase in investments caused by the IT boom,
fiscal deficit, and housing investment (which cause the
subprime mortgage problem)
(2) CA surpluses in Japan, China, and East Asia (<=
“saving glut” (Bernanke (2005))
(3) CA surpluses in oil-exporting countries (<=increase in
oil price) (Oil money flows via the EU, especially
London, to the US)
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Current account imbalances of the US vs. Japan
and East Asia (ASEAN5+3)
Current Account / GDP
%
8
US
6
JP
Asia (JP inc.)
4
Asia (JP exc.)
2
-2
-4
-6
-8
0
20
01
20
02
20
03
20
04
20
05
20
06
9
20
0
8
19
9
7
19
9
6
19
9
5
19
9
4
19
9
3
19
9
2
19
9
1
19
9
0
19
9
9
19
9
8
19
8
7
19
8
6
19
8
5
19
8
4
19
8
3
19
8
2
19
8
1
19
8
0
19
8
9
19
8
8
19
7
19
7
19
7
7
0
2005:1
2003:1
2001:1
1999:1
1997:1
130
Exchange Rate (left)
Current Account (right)
110
-1
-2
100
-3
-4
90
-5
80
-6
-7
70
-8
Percent of GDP
120
1995:1
1993:1
1991:1
1989:1
1987:1
1985:1
1983:1
1981:1
1979:1
1977:1
1975:1
1973:1
CY2000=100
Current Account of the US and the US$
2
1
0
Saving-Investment balances of private and
government sectors in the US
Figure 3: The US Saving-Investment Balance
8
Private
6
Government
2
0
-2
-4
-6
2005:1
2003:1
2001:1
1999:1
1997:1
1995:1
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1993:1
1991:1
1989:1
1987:1
1985:1
1983:1
1981:1
1979:1
1977:1
1975:1
-8
1973:1
Percent of GDP
4
6
Empirical Analysis on Exchange Rate Adjustment
for Current Account Imbalances (Ogawa and
Iwatsubo (2008))
• We used data before the global financial crisis to
investigate the adjustments of Japanese and East Asian
CA surplus, assuming that the US and global
economies have not yet experienced the global
financial crisis. The assumption means that fiscal
deficits, consumption, and investments of the US are
unchanged.
• VAR models are used to analyze the causality
relationship between their CAs and their related
economic variables (exchange rate (FXR) and others)
and to examine how their CA surplus has been adjusted
and how much FXR adjustment is needed.
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Comparison of exchange rate adjustments between
Japan and East Asia
• We compare the results of the impulse responses of CA
to FXR among Japan only, East Asia excluding Japan,
and East Asia including Japan.
• As for Japan, we investigate how much appreciation of
the JPY is necessary to reduce the Japanese CA surplus
from a current level (4% of GDP) to its half level (2% of
GDP).
• As for East Asia, we investigate how much appreciation
of AMU is necessary to reduce the CA surplus of East
Asia from a current level (3% of GDP) to its 1% of GDP
by 2% points that is the same change (% points) as
Japanese case.
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VAR models for Japan
• We use two kinds of VAR models to investigate the
effects of FXR on CA.
(1) Four-variable VAR model (Model J1): the logarithm of
real effective exchange rate (REER) of the JPY, the
ratio of Japanese CA in terms of GDP, the Japanese real
interest rate, and the Japanese GDP growth rate.
(2) Four-variable VAR model (Model J2): the ratio of
outward FDI in terms of domestic investments and the
ratio of IA to CA as well as the logarithm of the REER
of the JPY and the ratio of Japanese CA to GDP.
• Sample periods: (1) 1980Q1 to 1990Q4 and (2) 1991Q1
to 2006Q4
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VAR models for East Asia
•
East Asia includes eight countries (Japan, China, Korea,
Singapore, Malaysia, Indonesia, the Philippines, and Thailand) .
• We use two kinds of VAR models to investigate the effects of
FXR on CA for East Asia as a whole.
• East Asia excluding Japan
(1) Four-variable VAR model (Model EA1): the logarithm of REER
of East Asian currencies, a ratio of East Asian CA to GDP, East
Asian real interest rate, and East Asian GDP growth rate.
(2) Four-variable VAR model (Model EA2): a ratio of inward FDI to
domestic investments and a ratio of IA to CA in East Asia as well
as logarithm of REER of East Asian currencies and a ratio of East
Asian CA to GDP.
• East Asia including Japan
(1) Four-variable VAR model (Model EA3): the same four-variables
with Model EA1.
• 8/29/2009
Sample period: 1991Q1APSN
to 2006Q4
Conference
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Exchange rate adjustment to CA imbalance
Country/region
Models
Japan
Model J1
East Asia
excluding Japan
Model J2
Model EA1
East Asia
including
Japan
Model EA2
Model EA3
Responses to 1% appreciation during 50Q
Appreciation
2.56%
10.48%
18.52%
31.40%
6.79%
Reduced CA
surplus
0.23%
point
22.3%
0.73%
point
28.7%
1.53%
point
24.2%
3.61%
point
17.4%
0.87%
point
15.6%
Necessary
appreciation
during 50Q
for 2%point
reduced CA
surplus
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Analytical results
•
The comparison of the FXR adjustments to CA imbalances shows
that
(1) 22% to 29% of appreciation of the JPY during 12 and half years
is needed in order to reduce the Japanese CA surplus from the
current level (4%) to its half level (2%) by 2% point.
(2) 17% to 24% of appreciation of the AMU excluding the JPY
during the period is needed in order to reduce the CA surplus of
East Asia without Japan as a whole from the current level (3%) to
1% by the 2% point.
(3) 16% of appreciation of the AMU including the JPY during the
period is needed in order to reduce the CA surplus of East Asia as
a whole from by the 2% point.
• It is smaller appreciation of East Asian currencies as a whole that
is needed for the same % points of reduction in the CA than that
of the JPY only or other East Asian currencies .
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Scenarios of US dollar depreciation
•
•
•
•
Benchmark Scenario: About 20% of appreciation of the JPY
and 16% of appreciation of East Asian currencies, given the
situation before the global financial crisis and the current fiscal
deficit of the US.
Soft-landing Scenario: The subprime mortgage problems might
reduce housing investment, consumption, and investment. The
reduction reduces the current account deficits and, in turn,
contribute to smaller depreciation of the US$.
Crisis Scenario: The financial crisis in the US might lose
credibility of the US$. It causes a larger depreciation of the US$.
Most Realistic Scenario: The US$ keeps at the current level in
the short run. Increase in fiscal deficits of the US might cause
harder-landing in the long run.
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Moderate appreciation of US$ and sudden
depreciation of euro
•
Moderate appreciation of US$ and sudden depreciation of euro
since the Lehman Brothers Shock in September 2008.
•
The Lehman Brothers Shock clearly exists counter-party risk
in inter-bank markets especially in Europe.
•
European financial institutions who damaged their balance
sheet due to loss of securities backed by the subprime
mortgage cannot finance the US$ money.
•
Some of European countries occurred housing bubbles like the
United States.
=> Lesson: even the euro has depreciated so much even though the
euro is used for transactions within the euro area. The US$ is
still used for transactions with outsiders of the euro area.
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Unlimited supply of US$ to Europe rescued the euro
• In 2007, the ECB, Bank of England, and other central banks
concluded currency swap agreements with the FRB to give
supply of US$ liquidity to the central banks.
• The agreements extend to unlimited supply of US$ liquidity in
October 2008.
• The counter-party risk in inter-bank markets has reduced since
November 2008. However, credit risks are left (around 1%
point).
• Strong demand for the US$ against the euro and other European
currencies in interbank markets in Europe.
• It clarifies that economic agents in Europe needs the US$ for
external economic transactions even though they can use the
euro for intra-regional economic transactions.
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2006/7/26
2006/8/21
2006/9/14
2006/10/10
2006/11/3
2006/11/29
2006/12/25
2007/1/18
2007/2/13
2007/3/9
2007/4/4
2007/4/30
2007/5/24
2007/6/19
2007/7/13
2007/8/8
2007/9/3
2007/9/27
2007/10/23
2007/11/16
2007/12/12
2008/1/7
2008/1/31
2008/2/26
2008/3/21
2008/4/16
2008/5/12
2008/6/5
2008/7/1
2008/7/25
2008/8/20
2008/9/15
2008/10/9
2008/11/4
2008/11/28
2008/12/24
2009/1/19
2009/2/12
2009/3/10
2009/4/3
2009/4/29
2009/5/25
2009/6/18
2009/7/14
Movements of the euro and the pound
US$/euro
2
1.9
1.8
US $ TO EURO (WMR&DS) EXCHANGE RATE
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pound/US$
0.4
UK POUND TO US $
(GTIS/TR) EXCHANGE
0.45
1.7
0.5
1.6
0.55
1.5
0.6
1.4
0.65
1.3
0.7
1.2
1.1
0.75
1
0.8
Data: Datastream
16
2006/7/26
2006/8/21
2006/9/14
2006/10/10
2006/11/3
2006/11/29
2006/12/25
2007/1/18
2007/2/13
2007/3/9
2007/4/4
2007/4/30
2007/5/24
2007/6/19
2007/7/13
2007/8/8
2007/9/3
2007/9/27
2007/10/23
2007/11/16
2007/12/12
2008/1/7
2008/1/31
2008/2/26
2008/3/21
2008/4/16
2008/5/12
2008/6/5
2008/7/1
2008/7/25
2008/8/20
2008/9/15
2008/10/9
2008/11/4
2008/11/28
2008/12/24
2009/1/19
2009/2/12
2009/3/10
2009/4/3
2009/4/29
2009/5/25
2009/6/18
2009/7/14
信用スプレッド（LIBOR-TB、3ヶ月物、ドル）
％
4.5
D
Credit spread (LIBOR(US$)-US TB, 3 months)
4
3.5
3
2.5
2
1.5
1
0.5
0
D
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Reaction of East Asian currencies
•
AMU and AMU Deviation Indicators (AMU DIs)
（http://www.rieti.go.jp/users/amu/index.html)
(1) AMU（Asian Monetary Unit）: a weighted average of East
Asian (ASEAN+3 (China, Japan, and Korea))
(2) AMU DI: position of each East Asian currency against the
AMU based on benchmark period (2000-2001)
•
The AMU has been appreciating against a currency basket of
the US dollar and the euro since August 2008.
•
The AMU has been depreciating against the US dollar since
April 2008.
•
The AMU has been appreciating against the euro since July
2008.
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Value of AMU in terms of US dollar and euro
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Asymmetric reactions of East Asian currencies
•
•
•
•
•
AMU DIs of East Asian currencies shows their
asymmetric reactions against the global financial
crisis.
The Korean won changed from 20% of overvaluation
in October 2007 to 27% of undervaluation in October
2008. It depreciated by 47% points against the AMU.
The ASEAN5 currencies have depreciated against the
AMU.
The Japanese yen has a appreciating tendency with
volatility against the AMU since August 2007.
The Chinese yuan has appreciating against the AMU
since March 2008.
20
Nominal AMU Deviation Indicators
Figure 2. Nominal AMU Deviation Indicators
(benchmark year=2000/2001, basket weight=2004-2006,daily)
(%)
50
Brunei Darussalam
Cambodia
China P.R.
Indonesia
Japan
South Korea
Laos
Malaysia
Myanmar
Philippines
Singapore
Thailand
Vietnam
40
30
20
10
0
-10
-20
-30
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Jun-09
Apr-09
Feb-09
Dec-08
Oct-08
Aug-08
Jun-08
Apr-08
Feb-08
Dec-07
Oct-07
Aug-07
Jun-07
Apr-07
Feb-07
Dec-06
Oct-06
Aug-06
Jun-06
Apr-06
Feb-06
Dec-05
Oct-05
Aug-05
Jun-05
Apr-05
Feb-05
Dec-04
Oct-04
Aug-04
-40
21
AMU Deviation Indicators of depreciating currencies
AMU乖離指標（名目）
40
30
20
Indonesia
South Korea
Malaysia
Philippines
Singapore
Thailand
10
0
-10
-20
(データ）http://www.rieti.go.jp/users/amu/index.html
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2008/11/1
2008/10/1
2008/9/1
2008/8/1
2008/7/1
2008/6/1
2008/5/1
2008/4/1
2008/3/1
2008/2/1
2008/1/1
2007/12/1
2007/11/1
2007/10/1
2007/9/1
2007/8/1
2007/7/1
2007/6/1
2007/5/1
2007/4/1
2007/3/1
2007/2/1
2007/1/1
-30
22
(データ）http://www.rieti.go.jp/users/amu/index.html
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2008/11/1
2008/10/1
2008/9/1
2008/8/1
2008/7/1
2008/6/1
2008/5/1
2008/4/1
2008/3/1
2008/2/1
2008/1/1
2007/12/1
2007/11/1
2007/10/1
2007/9/1
2007/8/1
2007/7/1
2007/6/1
2007/5/1
2007/4/1
2007/3/1
2007/2/1
2007/1/1
AMU Deviation Indicators of appreciating currencies
AMU乖離指標（名目）
20
15
10
5
0
China,P.R.
Japan
-5
-10
-15
-20
23
Real AMU Deviation Indicators
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AMU DI convergences (Ogawa and Yoshimi
(2008, 2009))
•
•
Weighted averages of AMU DI have an increasing tendency.
We use two tests of convergence to show AMU DI
convergences among the East Asian currencies.
(1) β -convergence: AMU DIs in countries with relatively higher
AMU DIs have tendencies to decrease more rapidly than those
in countries with relatively lower AMU DIs.
(2) σ -convergence: cross-country dispersion (variance) of AMU
DIs has a tendency to decrease over time.
• We found that AMU DIs have an increasing tendency in terms
of β and σ -convergences. East Asian currencies is
diverging especially since 2005.
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Jan-2009
Oct-2008
Jul-2008
Apr-2008
Jan-2008
Oct-2007
Jul-2007
Apr-2007
Jan-2007
Oct-2006
Jul-2006
Apr-2006
Jan-2006
Oct-2005
Jul-2005
Apr-2005
Jan-2005
Oct-2004
Jul-2004
Apr-2004
Jan-2004
Oct-2003
Jul-2003
Apr-2003
Jan-2003
Oct-2002
Jul-2002
Apr-2002
Jan-2002
Oct-2001
Jul-2001
Apr-2001
Jan-2001
Oct-2000
Jul-2000
Apr-2000
Jan-2000
Weighted Average of Nominal AMU DI
(%)
Weighted Average of Nominal AMU Deviation Indicators (daily)
6
5
4
3
2
1
0
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Oct-2008
Jul-2008
Apr-2008
Jan-2008
Oct-2007
Jul-2007
Apr-2007
Jan-2007
Oct-2006
Jul-2006
Apr-2006
Jan-2006
Oct-2005
Jul-2005
Apr-2005
Jan-2005
Oct-2004
Jul-2004
Apr-2004
Jan-2004
Oct-2003
Jul-2003
Apr-2003
Jan-2003
(%)
Oct-2002
Jul-2002
Apr-2002
Jan-2002
Oct-2001
Jul-2001
Apr-2001
Jan-2001
Oct-2000
Jul-2000
Apr-2000
Jan-2000
Weighted Average of Real AMU DI
Weighted Average of Real AMU Deviation Indicators (monthly)
10
9
8
7
6
5
4
3
2
1
0
Exchange rate regimes in East Asia
• Officially announced EX rate regimes
Free Float
Managed Float
Japan, Korea,
Philippines
Indonesia, Singapore,
Thailand, Cambodia,
Myanmar, Laos,
Vietnam
Brunei
Fixed to the Singapore dollar
China, Malaysia
Reform in 2005
Officially announced EX rate regimes may differ from actual ones.
We employ Frankel and Wei (1994)’s method to investigate
actual (de facto) regimes employing.
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Coordination Failure in choosing Exchange Rate
Regimes
• The widening deviations among the East Asian
currencies reflect the fact that the monetary authorities
of East Asian countries are adopting a variety of
exchange rate systems. In other words, a coordination
failure in adopting exchange rate regimes among the
monetary authorities of East Asian countries increases
volatilities and misalignments of the intra-regional
exchange rates in East Asia (Ogawa and Ito (2002)).
• Misalignments and volatility of intra-regional FXR
among East Asian currencies have adverse effects on
East Asian economy where production networks have
been establishing.
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Chiang Mai Initiative (CMI)
• The CMI includes bilateral currency swap arrangements (CSA)
for managing currency crisis and a surveillance process for
preventing currency crisis.
• However, the CMI has limitations: (1) A total amount of CSA is
US$ 90 billion. It is not enough! (2) 80 % of the amount is
implemented only after the IMF decides to give a financial support
to the country (IMF Link) for managing balance of payment crisis.
• The Korean government rushed to not the CMI but the FRB to
conclude a new CSA and implement it promptly. It shows that the
CMI is not effective in implementing for providing US$ liquidity
to Korea.
• Japanese, Chinese, and Korea governments decided to increase
CSA between Japan-Korea and China-Korea last December. BOJ
and BOK concluded the CSA in terms of the JPY and the won
(US$ 30 billion) without any IMF Link.
30
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CMI Multilateralisation (CMIM)
• ASEAN+3 Financial Ministers have agreed an extended CMI
and multilateralisation of the CMI in May 2009.
• CMIM has two core objectives:
(1)To address short-term liquidity difficulties in the region,
(2)To supplement the existing international financial arrangement.
• Multilateralisation: the multilateralised arrangement will be
governed by a single contractual agreement.
• Agreed that an independent regional surveillance unit will be
established as soon as possible to monitor and analyze regional
economies and support CMIM decision-making.
• Hong Kong participates in the CMIM.
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Total size and contribution portions of CMIM
• Total size of CMIM: US$ 120 billion
• Contribution portions:
Japan: US$ 38.4 billion (32%)
China (including Hong Kong): US$ 38.4 billion (32%)
(China (excluding Hong Kong): US$ 34.2 billion
(28.5%)+ Hong Kong: US$ 4.2 billion (3.5%))
Korea: US$ 19.2 billion (16%)
ASEAN: US$ 24 billion (20%)
• Borrowing Multiplier:
0.5 (Japan and China), 1 (Korea), 2.5 (ASEAN5 and
Hong Kong) to 5 (New ASEAN countries)
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Decision-making mechanism of CMIM
• Fundamental issues will be decided through
consensus of members of ASEAN+3.
Fundamental issues include Review, contribution, and
borrowing multiples), Re-admission, Membership, Terms
of Lending.
• Lending issues will be decided through majority.
Lending issues include Lending, Renewal, and Default.
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Conclusion (1)
•
•
•
In the short run, shortage of the US$ liquidity (especially in
interbank markets in Europe) is more sever than loss of the
US$’s credibility. It has depreciated the euro against the
US$.
In the long run, the injection of money to US financial
institutions by the US government will be more problematic.
It will increase fiscal deficits. The increase fiscal deficits
should increase the CA deficit of the US and, in turn, make
further depreciation of the US$.
The global financial crisis have asymmetric effects on East
Asian currencies.
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Conclusion (2)
•
•
(1)
(2)
(3)
(4)
(5)
We should reconsider effective implementation of the CSA
under the CMI in order to provide US$ liquidity to currencycrisis countries.
The CMI should be improved by leasing the limitations. The
CMI should be developed in the following points:
Multilateralize the bilateral CSA,
Increase total amount of CSA,
Reduce a share of IMF Link,
Strengthen monitor and surveillance over exchange rates and
macroeconomy of East Asian currencies, and
Establish standing organization to monitor and surveillance
and to provide liquidity to currency crisis countries.
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References
•
•
•
•
•
Bernanke, B.S., “The global saving glut and the U.S. current account deficit,”
Remarks at the Sandridge Lecture, Virginia Association of Economics,
Richmond, Virginia, March 10, 2005.
Ogawa, Eiji and Takatoshi Ito, “On the desirability of a regional basket
currency arrangement,” Journal of the Japanese and International Economies,
vol. 16, No. 3, 317-334, 2002.
Ogawa, Eiji and Kentaro Iwatsubo, “External adjustments under increasing
integration: Japanese Perspective,” PEO Structure Specialist Meeting, 2008.
Ogawa, Eiji and Taiyo Yoshimi, “Widening deviation among East Asian
currencies,” RIETI Discussion Paper Series, 08-E-010, 2008.
Ogawa, Eiji and Taiyo Yoshimi, “Analysis on β and σ convergences of
East Asian currencies,” RIETI Discussion Paper, 09-E-018, 2009.
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