Regional Exchange Rate Management and Trade Integration in East Asia

The role of real exchange rate changes and redistribution of world expenditures in international macroeconomic adjustment is as old as the economics science. A truth is that both the forces are simultaneous and will continue to play the key role in the process of international adjustment. A large number of literature estimated trade effects of real exchange rate changes and shifts in relative incomes and drew policy implications for the resolution of global payment imbalances. Only a few studies, however, considered the phenomenon of international organization of production into the modeling of trade equations. The consideration has an important implication. It is that exports by country are recorded on a gross basis rather than as value added and therefore the domestic value added is only a part of the gross value of the exports. An appreciation by the exporting country per se will affect only the domestic value added but not the gross value. But a joint appreciation by countries supplying intermediate goods will increase the dollar cost of intermediate goods imported into the exporting country. This book proposes a clear framework to this end and documents consistent estimates of trade effects of real exchange rate changes and shifts in relative incomes.

The standard two-country trade model assumes that the observed bilateral exports exhibit an equilibrium behavior of both supply and demand schedules. An implicit assumption of this modeling is that local value added in the gross value of final exports is substantial. In the context of East Asia, this modeling does not recognize an essential point that the domestic value added is only a part of the gross value of exports and that the dollar cost of intermediate inputs imported from other Asia represents a significant share of the gross value of final exports from an East Asian country to the United States and elsewhere. This book thus proposes a value added approach considering East Asia as an economic region. A reduced-form equation is derived for the gross value of final exports from an East Asian country to the rest of the world. The modeling and estimations bear substantial policy implications for resolving global payment imbalances.

The first essay of this research monograph empirically examines if the actual policy environment relative to the optimal choice, in presence of an external shock, can significantly affect East Asian production networks and thereby the pattern of regional trade integration. While the actual policy environment is characterized by heterogeneous exchange rate regimes of East Asian countries, the optimal choice is assumed to be a currency area arrangement whereby the countries either share a single currency or have their exchange rates fixed to one another. It is thereby an ex ante analysis of a potential institutional arrangement.

The second essay examines if a choice of fixed-to-floating can be optimal for a national currency in East Asia. If the region itself is an optimum currency area, any regime choice for a national currency will prove non-optimal. The paper examines this proposition for the cases of China and Japan, because these two countries have respectively de facto peg and independently floating exchange rate regimes.

The issue of global payment imbalance against East Asia including China, in particular, is one central debate in international macroeconomics. There are two competing views on the issue. The dominant view as borne by the U.S. Congress is that the global imbalance is largely because of the undervalued Chinese Renminbi (RMB). The other view as shared by Alan Greenspan and many others is that a collective exchange appreciation by all East Asian countries will be required to correct the imbalance against China as well as East Asia. The third essay empirically tests the hypothesis that a generalized appreciation of all East Asian exchange rates would reduce East Asian exports to the world.

Author: Mizanur Rahman
Publisher: Createspace Independent Publishing Platform
Published: 12/31/2011
Pages: 124
Binding Type: Paperback
Weight: 0.39lbs
Size: 9.02h x 5.98w x 0.26d
ISBN: 9781514179659

About the Author
Dr. Mizanur Rahman is an associate professor of Accounting and Public Policy in the Department of Accounting & Information Systems of the University of Dhaka. He got his undergraduate and graduate degrees in accounting from the same university. Later he obtained Master and Ph.D. degrees in public policy from the National Graduate Institute for Policy Studies (GRIPS) in Japan. Dr. Rahman worked as a researcher at the Research Institute of Economy, Trade and Industry (RIETI) of the Government of Japan in 2006-07. Then he worked as an economist in the Asian Development Bank Institute (ADBI) in 2008-09. Dr. Rahman's research interests include (i) Capital market relevance of accounting information, (ii) Macroeconomic and monetary management in Bangladesh, (iii) Global payment imbalance and international macroeconomic adjustment, (iv) Exchange rate economics, and (v) Regional trade and economic integration. He is currently the project director of "Accounting for Capital Market Development in Bangladesh," a research project jointly administered by the World Bank and the University Grants Commission (UGC) of Bangladesh. Dr. Rahman is also a member of a team of the World Bank reviewing macroeconomic and monetary management in Bangladesh. His professional engagements included international consultancies with Asian Development Bank (ADB), ADB Institute, World Bank and the UN organizations. Dr. Rahman received several competitive research grants from these organizations. He has been a visiting professor to National Graduate Institute for Policy Studies (GRIPS) and Sophia University in Japan and to several private universities in Bangladesh. Dr. Rahman has widely published in international journals. His research works are featured in IDEAS/RePec, EconPapers, Social Science Research Network (SSRN) and Global Development Network (GDN) websites. He often appears in electronic media and writes op-eds in print media on issues of public policy relevance. In January 2010, the Global Development Network (GDN) awarded Dr. Rahman the Luxembourg Ministry of Finance First Prize for his outstanding research on development under the theme of "Regional Integration-Convergence Big Time, or, an Opportunity Wasted." The GDN President Dr. Gerardo della Paolera presented him the award pointing out that the research won the competition featured by 486 scholarly submissions and that he was the only Bangladeshi citizen to have ever won the medal for research on development.


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