Patterns of Exchange Rates and Current Accounts: The East Asian Waltz

Pattens of Exchange Rates and Cuent Accounts: The East Asian Walt Andew Sheng* Adjunct Pofesso Univesity of Malaya, Kuala Lumpu and Tsinghua Univesity, Beijing as@andewsheng.net Kwek Kian Teng** Associate Pofesso Faculty of Economics & Administation, Univesity of Malaya, Kuala Lumpu ktkwek@um.edu.my Cho Cho Wai Faculty of Economics & Administation, Univesity of Malaya, Kuala Lumpu * Email: as@andewsheng.net ** Email: ktkwek@um.edu.my

Pattens of Exchange Rates and Cuent Accounts: The East Asian Walt Andew Sheng Adjunct Pofesso Univesity of Malaya, Kuala Lumpu and Tsinghua Univesity, Beijing Kwek Kian Teng Faculty of Economics & Administation, Univesity of Malaya, Kuala Lumpu Cho Cho Wai Faculty of Economics & Administation, Univesity of Malaya, Kuala Lumpu. Intoduction / and / ae emembeed as two defining moments that gipped Asia. / saw woldwide economic meltdown due to financial contagion which stated in Thailand with the financial collapse of the Thai Baht caused by the floatation of the Baht. As the financial cisis spead, most of Southeast Asia and Japan also saw slumping cuencies, devalued stock makets and othe asset pices, and a pecipitous ise in pivated debt. / saw again a epeat of the / fea. Howeve, this fea is diffeent as the impact is felt woldwide and is tansmitted via many outs - began since Lehman Bothes filed fo bankuptcy in Septembe, Meill Lynch bought ove by Bank of Ameica, and AIG escued by the US Govenment bailouts via TARP I, TARP II toubled assets elief pogamme, and othe elief pogammes, e.g. TALF Tem Asset-Backed Secuities Loan Facility. This global financial cisis, oiginated by the US subpime cisis that impacted the East Asian economies in a systemic manne, saw Stauss-Kahn Dominique, managing diecto of IMF, coining it as the Geat Recession. The evebeation of this systemic cisis saw also stock makets plunged shaply -%, substantial depeciation of the Asian cuencies except Yen against the US dolla, and inceased widening of isk in debts %-%. This study attempts to undestand these systemic pattens using the Phaso Analysis as in the netwok theoy of electical and electonic engineeing. This phaso analysis would enable us to measue the centipedal/centifugal foce that pushes the East Asia financial and exchange ate aangements into a cetain tajectoy path. One of these foces is stemmed lagely though the pocess of egionalism since the fomation of the Asian Global Supply Chain in the s. Like the Akamatsu Japanese Flying Geese Theoy of East Asian gowth model, the patten of poduction netwok and emegence of the supply chain saw Japan fist emeging into the industial wold and helped ceate the Asian Global Supply Chain to meet US and global demand fo consume goods by investing in the est of Asia. This pocess was helped by the usage of the US dolla as the key cuency that loweed tansaction costs and isks. De facto pegs against the dolla gave the est of Asia the fiscal, monetay and tade disciplines that foced stuctual adjustments fo them to benefit fom joining the supply chain.

Section of this study gives the backgound and motivation. Section explains the methodology using the Phaso Analysis. This analysis maps the phase o the position of economic vaiables in two-dimension epesented in tems of angel in adians and adius. Section gives the esults, and Section gives some policy implications dawing fom the Phaso esults. Section concludes.. East Asian Economic Flight The East Asian gowth model had become a widely celebated model even till today Wold Bank, Kojima, Schoeppel and Nakajima, and ADB. Afte Japan emeged as a highly industialied nation afte Wold Wa II, Japan s expots that shifted to the US makets offeed new oppotunities fo othe East Asia s newly industialiing economies like South Koea, Hong Kong, Singapoe and Taiwan to be pat of the poduction netwok and the global supply chain. Like the Akamatsu s Japanese Flying Geese Theoy Akamatsu,,, the success of Japan uplifted the est of East Asia s economies. The success and ise of the highly industialied South Koea, Hong Kong, Singapoe and Taiwan late became known as the Asian tiges. In the last yeas between the ealy s and s, East Asia economies have gown not only iche by also close. ASEAN- s gowth ates also moved boadly in a synchonied patten with the advanced East Asia counties Figue.. Clealy, in the pocess of industialiing, each of these economies became moe complexly integated into the global supply chain and the poduction netwok though the pocess of egionalism Sheng et al,. Figue. GDP Gowth Rates fo East Asia Souce: EIU Note: data ae pojections by EIU

Figue. also shows that in vaying degees, East Asia was devastated by the Asian Financial cisis /. As expected, as all the gowth ates deceleated and expeiencing negative gowth ates, expots also would decline. Howeve, the expots cycle swings elatively lage than gowth ates except the peiod duing the Asian Financial cisis Figue.. Like gowth ates, the expots tends also follow a simila boad patten. This geneal patten eflects the vaying degees of East Asia s tade openness Figue.. Figue. Expots Gowth Rates fo East Asia Souce: IFS The synchoniation of gowth ates of East Asia also eflects the highly expot-oiented dependence Lin,. East Asia s expot-led nations ae also poving to be extemely vulneable to a synchonied global tade, as East Asia accounts fo % of tade openness to wold tade Figue. and consisting of % of wold tade double the amount of US Figue.. It is not supising then that should the wold suffes a ecession, East Asia would also be affected, as synchonied downtun in advanced economies would cetainly add pessue on East Asia s tade. As advanced economies account fo about two thids of global GDP, it is thus not supising that the global financial cisis / will see East Asian s expots. The collapse of global demand calls into question the sustainable viability of the expot-led gowth model that had helped to jump-stat the tansfomation of East Asia into the often egaded model collection of dynamic economies they ae today.

Figue. East Asia Tade Openness % Souce: IFS and COMTRADE database Figue. Pecentage of East Asia Tade fom Global Tade Souce: IFS and COMTRADE database Due to East Asia lage dependence on wold tade Figue., East Asia would also suffe fom the slowing expots and manufactuing poduction when demand fom majo advanced counties contacts. ASEAN- s cuent account balance would decline shaply, and IMF pojected that the ASEAN- total cuent account would decline by % by Figue..

Figue. ASEAN- Total Cuent Account Balance Souce: IMF and Wold Economic Outlook database Unfotunately, Asian capital makets bond and equity makets emain elatively shallow and less attactive elative to the US and Euope as centes fo savings despite effots to deepen and boaden the makets. East Asia accounts only.% of wold maket capitaliation Figue.. The lagest maket capitaliation is Japan US$. tillion, followed by Singapoe US$ tillion and Hong Kong US$. tillion Figue.. In tems of maket capitaliation to GDP, the ASEAN- atios emain elatively small Figue.. The eal issues ae the unde-development of financial institutions, high tansaction costs, and mindset baies to delive value to investos and saves. Patly because of national tuf issues, the Asian financial makets emain lagely pockets of local makets, loosely linked though efficient connections with London and New Yok athe than with each othe.

Figue. Pecentage of East Asia Maket Capitaliation Souce: Wold Fedeation of Exchanges Figue. East Asia Capital Maket Capitaliation Souce: COMTRADE database

Figue. ASEAN- Pecentage of Maket Capitaliation to Total GDP Souce: IFS In conclusion, against a highly synchonied eal secto, East Asia s financial makets also show simila boad pattens. That is, when the global financial makets ae plummeting, the East Asia financial makets would also plummet amid speading systemic global isks and feas. The state of these macoeconomic indicatos seem to einfoce the dive fo the East Asian model, i.e. egionalism, that encompasses deepening intedependence on vaious sphees of economic activity, coopeative effots and gowing commitment to intenational collaboation. In the following section, we apply an engineeing tool, i.e. netwok/cicuit theoy, to measue the degee of maket-netwok amongst these East Asian economies, that is to what extent ae these makets synchonied?. Methodology: The Phaso Analysis. Phaso Diagam The wold is an economic system that consists of asymmeties. The fact that ou wold does not behave pefectly symmetically is due to deviations fom symmety o equilibiums. This study attempts to tansfom the asymmetical ealities back into symmetical spaces measued in shapes of cicles and cycles of sinusoidal o sine waves. This tansfomation involves putting physics back into economics Klein,. Physics in Economics Klein confonts economics like physics, and asked what if economics wee like physics. This is because thee ae enomous advantages in had science ove social and behavioual science, as social science like economics involve vaiables that do not feel neutal. In the electical engineeing liteatue, sinusoidal waves using phaso diagams Bakshi, and Bakshi, ae most fequently used to measue cicuits o netwoks cicuits and

netwoks ae used synonymously in the engineeing teminology. In the analysis of netwoks, it is necessay to know the position of the phaso epesenting that altenating quantity at a paticula instant. In economic system, the altenating quantity is tanslated as maket distotions fom a point of efeence o a paticula instant. The position P in the phaso is epesented in tems of angle in adians o degees, measued fom efeence o. The phase measued in anticlockwise diection is positive while the phase measued in clockwise diection is negative. Figue. maps any two dimensional point on the cicle fom a Cathesian space into a sine wave. Figue. Phaso Diagam Notes: The Phaso Diagam consists of a cicle and a cycle. The sie of the cicle is the height of the cycle. The sie of the cicle o height of cycle epesents macoeconomic imbalance.. Phaso Repesentation and Wavefoms Next, we intoduce the maket measuements fo the x-axis and y-axis in depicting maket distotions o asymmeties. Fo the y-axis, a pice deviation vaiable is used to depict pice distotions in the foeign exchange makets. The x-axis, a quantity/volume vaiable is used to depict macoeconomic imbalance though the atio of cuent account and level of Goss Domestic Poduct CA/GDP. Fo the y-axis, the deviation fom the fundamental equilibium exchange ate DevFEER is used to epesent maket pice distotions. If DevFEER =, it means maket distotions does not exist. If DevFEER >, it implies the spot exchange ate against the US dolla is undevalued U. And if If DevFEER <, it implies the spot exchange ate against the US dolla is ovevalued O. Fo the x-axis, when CA = GDP, it implies balanced quantity. Howeve, this situation is impossible to achieve in economic ealities. If CA > GDP, it implies cuent account suplus S, and if CA < GDP, it implies cuent account deficit D.

See Appendix fo an explanation on the computation of Cline and Williamson fundamental equilibium exchange ates. The cuent account is chosen as a quantity fo the x-axis because the amount of cuent account in East Asia is elatively lage compaed to the potfolio investments in the financial account Figue.. Deviation of the fundamental equilibium exchange ate is used as a measue of cuency misalignment because cuency misalignment implies inefficient allocation of domestic esouces. An ovevalued cuency would lead to a movement in esouces away fom the taded secto to the nontaded secto. O if counties impot oil fom the outside, a misaligned cuency would cause highe eal cost of oil in one impoting county elative to the othe Engel,. Cuency misalignments ae caused by nominal wage stickiness and impefect pass-though that aises fom stategic behavio by fims. Figue. Figue. Phaso Repesentation and Wavefoms d Phase I : Suplus and Undevaluation S,U Phase II: Deficit and Undevaluation D,U Phase III: Deficit and Ovevaluation D,O Phase IV: Suplus and Ovevaluation S,O

The distance d measues how fa away fom the oigin o. x-axis Cuent account as a pecent of GDP: Phases I and IV ae the egion of excessive cuent account suplus as a pecent of GDP. Phases II and III ae the egions of excessive cuent account deficit. Oigin o means cuent account balance. y-axis FEER deviation index: This index eflects the deviation of county s bilateal exchange ates to fundamental equilibium exchange ates FEERs which ae based on the intenational cuent account imbalances. Thus, Phases I and II ae egions of undevaluation and Phases III and IV ae egions of ovevaluation Figue.. The distance d is calculated by using the Pythagoas theoem: d = x y CA GDP DevFEER. In eality an economy has the tendency to position in any phase of the wave except at the point of oigin o. This is because the wold is an economic system that consists of asymmeties and distotions. The state of the economy at the equilibium at point, is a non-achievable state Figue.. Figue. Sinusoidal Wave

. Feedback Mechanism. Feedback Loop Within the engineeing netwoks, thee exist esistances and souces of enegy. Tanspoting this analysis into ou Phaso analysis, we postulate that the economic system also consists of esistances fictions and souces of enegy. Expanding this concept into a micoscopic level, we can expess these souces of enegy as paticles of enegy netwok. These thee difficult o often non-quantifiable souces of enegy ae: Impulses extenal foces o stochastic shocks like a banking cisis/contagion; Inetia esistance to change in a state of motion ; and Design egulation changes, govenment intevention, othe institutional factos. Impulses ae extenal shocks to the economic system. Fo example, the global financial cisis is anothe example of extenal shock to the ecessionay gowth ates in Asia. Inetia is the esistance to change in a state of motion. If the gowth of GDP is measued as the state of the economy Kwek and Cho,, then inetia is caused by political and institutional esistance to change. Fo example, the debate fo a common cuency fo Asia to ente into a monetay union has encounteed many esistances due to Asia being an enigmatic bloc, having divese institutional, economic and geo-political stuctues. Design epesents the inte-weaving elationships between macoeconomic policies, institutional policies and egulatoy-supevisoy policies. Some examples ae monetay policy, fiscal policy, exchange ate policy, maket infastuctue, and legal conditions. An accumulation of these souces of enegy would ceate a feedback loop, because these enegy that is impulses, inetia and design ove time would ceate centipetal/centifugal foces that push the sinusoidal wave inwad/outwad. Ove time inwad outwad movements of the sinusoidal wave would imply smalle lage deviations fom symmety. Outwad movements of the sinusoidal wave would imply lage deviations fom symmety.. Measuing Centipetal Foce and Centifugal Foce Conside two counties A and B having same time peiod but having diffeent maximum values that is R A and R B, whee, A = R A sin and, B = R B sin. If R A > R B, then a compaative static phaso epesentation and wavefoms of both the quantities ae shown in Figue.. The phasos OA county A = R A and OB county B = R B. The OA and OB phaso achieve thei maximum deviation fom FEER at π/ adian and point P shows the location of county A on the sine cuve. This would also imply that county A would have lage maket distotions and asymmeties compaed to county B.

Figue. Compaative Static Phaso Repesentation and Wavefoms P P Let s conside only county A, whee it expeiences an accumulation of souces of enegy ove time. This enegy an accumulation of impulses, inetia and design can also be tanslated into centipetal/centifugal foce that pushes o shifts the sinusoidal wave inwad/outwad. Ove time inwad outwad movements of the sinusoidal wave would imply smalle lage deviations fom symmety. Outwad movements of the sinusoidal wave would imply lage deviations fom symmety. If the centipetal/centifugal foce is put into the fom of the phaso epesentation to show the economic foces, it is then a fom of acceleation. The centipetal/centifugal acceleation a can be measued by velocity and distance fom the oigin. Foce a = Velocity v Distance d whee velocity is v = x y CA GDP DevFEER An illustation of the centipetal/centifugal foce fo county A is given in Figue.. The figue shows the impact of centipetal o centifugal foce on the phaso diagam and the sine wave. County A s adius will be educed by the centipetal foce Panel a, but it can also get lage in sie if it is caused by the centifugal foce Panel b. Atuahene-Gima and Sheemata adopts the effects of centifugal and centipetal foces on poduct development speed and quality.

Figue. Feedback Mechanism in Phaso Repesentation and Wavefoms Panel a Panel b. Results: The East Asian Walt This section shows the phaso esults fo East Asia in the pe-cisis peiod - of the Asian Financial cisis of / and the post-cisis peiod -. See Appendix II fo a detailed calculation of the centipetal and centifugal foce in adians and degees. Each county s position on the sine waves will be summaied by the following phases: Phase I : Suplus and Undevaluation S,U Phase II: Deficit and Undevaluation D,U Phase III: Deficit and Ovevaluation D,O Phase IV: Suplus and Ovevaluation S,O In the pe-cisis peiod, Figue. suggests that we can diffeentiate two clustes of counties, namely, Indonesia, Malaysia, the Philippines, Thailand and South Koea in Cluste I, and Cluste II would include Singapoe, Japan, China and Hong Kong. Cluste I pe-cisis Indonesia is located in Phase II - Deficit and Undevaluation D,U. Malaysia is located in Phase II - Deficit and Undevaluation D,U. Philippines is located in Phase II - Deficit and Undevaluation D,U. Thailand is located in Phase II - Deficit and Undevaluation D,U. Koea is located in Phase II - Deficit and Undevaluation D,U. Cluste II pe-cisis Singapoe is located in Phase I - Suplus and Undevaluation S,U. Japan is located in Phase I - Suplus and Undevaluation S,U.

China is located in Phase I - Suplus and Undevaluation S,U. Hong Kong is located in Phase I - Suplus and Undevaluation S,U. Figue. Pe-Cisis Phaso Diagam and Wavefoms Howeve, in the post-cisis Figue., the diagams suggest that we can diffeentiate again into two clustes of counties, namely, Indonesia, Malaysia, the Philippines, Thailand and South Koea in Cluste I, and Cluste II would include Singapoe, Japan, China and Hong Kong. Cluste I post-cisis Indonesia is located in Phase IV - Suplus and Ovevaluation S,O. Malaysia is located in Phase IV - Suplus and Ovevaluation S,O. Philippines is located in Phase IV - Suplus and Ovevaluation S,O. Singapoe is located in Phase IV - Suplus and Ovevaluation S,O. Thailand is located in Phase IV - Suplus and Ovevaluation S,O. Koea is located in Phase IV - Suplus and Ovevaluation S,O. Japan is located in Phase IV - Suplus and Ovevaluation S,O. Cluste II post-cisis China is located in Phase I - Suplus and Undevaluation S,U. Hong Kong is located in Phase II - Deficit and Undevaluation D,U.

Figue. Post-Cisis Phaso Diagam and Wavefoms Oveall, a elative compaison between the two time-peiods would suggest that only China s maket was not affected by the Asian Financial cisis, as China s position emain in Phase I in both the pe and post cisis peiod. Howeve, Japan and Singapoe economies moved fom Phase I to Phase IV. Both the Singapoe dolla and the Yen also became moe ovevalued, as a esult fom excess cuent account suplus. In geneal, in the post-cisis peiod, the sie of the cicles and cycles ae lage as compaed with the pe-cisis peiod. This suggests that the macoeconomic imbalance amongst the East Asian counties has gown lage. The post-cisis ovevalued exchange ates of most of the cuencies would eflect the high foeign exchange eseves that East Asia has accumulated. Afte the Asian Financial cisis, East Asia has ceated two distinct phenomena in the financial and capital makets: i High foeign exchange eseves, with Lane and Milesi-Feitti, obseving that Asia has become a net expote of capital ceating the othe side of the global imbalance; and ii Savings have flowed back into Asia, though what Dooley, Folkets-Landau and Gabe called the Total Equity Retun Swap effect. In thei balance sheet analysis, Lane and Milesi-Feitti pointed out that East Asia was concuently both an expote of manufactues and capital Figue.. At the end of, Asia had a net foeign asset position of % of GDP US$. tillion, wheeas Euope had a net liability of.% of GDP US$. tillion, and NAFTA had a much lage net liability of.% of GDP US$. tillion.

Figue. USD tillion. Gowing Imbalances: Net Extenal Positions.... -. -. -. -. -. United States Japan Asia ex-japan Eu ope Austalia and Canada OPEC Othes -. Souce: Wold Bank Financial Stuctue Dataset, Febuay Table. gives a detailed counties compaison of the phaso analysis between the pecisis, cisis and post-cisis peiods. It computes the values fo the feedback mechanism as measued by centipetal and centifugal foces. If in the pe-cisis peiod, county A expeiences a centipetal foce value is positive, then in the next peiod the adius of the sinusoidal wave fo county A should be smalle. Howeve, when county A expeiences a centifugal foce value is negative, then in the next peiod the adius of the sinusoidal wave fo county A should be lage. Fo example, when Malaysia expeienced a centifugal foce of. in the pe-cisis phase, this implies that the adius in the next phase would be elongated fom adius of. to adius.. In the pe-cisis and cisis peiods, Indonesia, Malaysia, Singapoe, Japan, and South Koea have all expeienced centifugal foces that have also pushed the sinusoidal waves outwad in the following peiod. This explains that any extenal shocks to an economy would enlage maket distotions and most of the time they ae quite pemanent. Cluste I: Counties Sinusoidal Waves Enlaged Indonesia Malaysia Singapoe Japan Koea

Table. Summay of Phasos and Feedback Mechanisms County Peiod FEER CA/GDP% Radius Centipetal+/Centifugal foce* Degee Radiansπ Indonesia Pe cisis..... Cisis..... Post Cisis..... Malaysia Pe cisis..... Cisis..... Post Cisis..... Philippines Pe cisis..... Cisis..... Post Cisis..... Singapoe Pe cisis..... Cisis..... Post Cisis..... Thailand Pe cisis..... Cisis..... Post Cisis..... Japan Pe cisis..... Cisis..... Post Cisis..... Koea Pe cisis..... Cisis..... Post Cisis..... China Pe cisis..... Cisis..... Post Cisis..... HK Pe cisis..... Cisis..... Post Cisis..... Notes: * Negative values means centifugal foce Positive values means centipetal foce. China and the Philippines expeienced centifugal foces in the pe-cisis peiod, but centipetal foces in the cisis peiod. Thus thei sinusoidal waves ae smalle in the postcisis peiod as compaed to the cisis peiod.

Cluste II: Counties Sinusoidal Waves Deceased Philippines China Thailand s expeience on the feedback mechanism is most extaodinay. In the cisis peiod, Thailand went though the lagest centifugal foce as compaed to othe Asian economies. This is because the cisis stated in Thailand with the financial collapse of the Thai Baht caused by the decision of the Thai govenment to float the Baht. At that time, Thailand had acquied a huge buden of foeign debt like Ieland s in the cuent global financial cisis that made the county effectively bankupt even befoe the collapse of its cuency. The feedback mechanism in Table. can also be used as a pedicto to a futue phaso fo all the East Asian economies. Accoding to the positive values of the centipetal foce ecoded in the post-cisis peiod, all the East Asian economies except China would expeience smalle sinusoidal waves. This would suggest that these economies except China ae eady to ove-come futue maket asymmeties, distotions and macoeconomic imbalances, and adjusting towads maket coection. The pediction is only valid should these economies do not anticipate any new impulses o new extenal shocks. Thus, this is but one of the limitations to this phaso analysis. In conclusion, these Figues. and. suggest that the East Asian economies ae one enmeshed netwok, with high integation and inte-dependence. These phaso diagams also display that these East Asian economies wee aleady dancing in a gand walt, heewith called the East Asian Walt.. Regionalism in Action? In this section, we chat the inceased macoeconomic imbalance by county. Figue. shows that in total, the centifugal foce aea sky-blue legend is lage compaed to the total centipetal foce aea apple-geen legend. This suggests that East Asia counties have moved futhe apat lage cycles fom each othe afte the Asian cisis disupted the patten, as compaed to the aleady self-oganiing o moving-in-unison patten smalle cycles in the pe-cisis peiod Sheng, c. At pesent, East Asia s achitectue of egional coopeation ADB, is elatively boad, vaied and ovelapping. Five of these ovelapping egional bodies ae plotted in Figue., namely, APEC = Asia-Pacific Economic Coopeation, ASEAN+ = ASEAN + thee counties, ASEAN = Association of Southeast Asian Nations, ASEM = Asia-Euope Meeting, and EAS = East Asia Summit. These divese foums ange in scope and policy objectives would call fo geate egional coopeation as these ovelapping membeships of the vaious coe goups would impede athe than stengthen coopeation. The emeging post-cisis cycles would equie geate coodination policies amongst the East Asia counties in ode to coect these lage imbalances.

Figue. A Compaison Between Pe-Cisis Sine Cuve and Post-Cisis Sine Cuve Notes: Centifugal Foce causing Sine Cuve to Enlage Centipetal Foce causing Sine Cuve to Contact

Figue. Asian Regional Achitectue Notes: APEC = Asia-Pacific Economic Coopeation, ASEAN+ = ASEAN + thee counties, ASEAN = Association of Southeast Asian Nations, ASEM = Asia-Euope Meeting, and EAS = East Asia Summit. Conclusions The pe-asian cisis peiod showed that the East Asia economies wee aleady leaning to dance-in-tandem. Soft-pegging against the US dolla has also enabled these East Asian counties to lean to tade and coodinate poduction and distibution chains in Asia. Though such soft-pegging, these egional cuencies wee aleady flying-in-unison fomation. This flight path fo the Asian cuencies can be seen as an infomal monetay aangement that was adjusting to the needs of the Asian supply chain. The post-asian cisis peiod saw East Asia econstucting itself unde temendous intenal and extenal pessue. The egion also undestood the danges of balance sheet weaknesses, paticulaly the double mismatch poblem that plagued the Asian cisis economies. As Asian s egional paticipation in egional foums inceased, Asia continued to open-up moe of its financial system, educed its extenal debt and also built up consideable foeign exchange eseves. These ae all wothy steps that the East Asian govenments have taken to pepae themselves against any futue financial/extenal shocks. Unfotunately, these individual county policies have also followed with lage disodination. Given its cuent egional institutional development, the findings of this study would suggest that a dense netwok of coodinated policies is equied to futhe deepen the financial integation pocess following the ASEAN Economic Community Bluepint.

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APPENDIX I Estimating Williamson s Fundamental Equilibium Exchange Rate This appendix applies the fundamental equilibium exchange ate FEER method of Cline and Williamson. Define the paamete γ that indicates the change in a county s cuent account balance as a pecent of GDP that takes place in esponse to a change in the county s eal effective exchange ate by pecent. Such a elationship is to be expected fom the influence of the elative pice vaiable in detemining demand and supply of expots and impots. This pice vaiable can be seen as one of the aguments in the equations fo impots and expots, with the othe main agument being the income vaiable, o the ate of gowth in the domestic economy fo the impot equation o the foeign economies tade weighted fo the expot equation. Fom the national accounts identity it will also be necessay that the tade deficit goods and sevices equals the excess of investment ove domestic saving including saving by the govenment. In this geneal equilibium system it will be necessay by implication that changes in domestic absoption occu in paallel to the changes diectly pedicted fom the expot and impot equations in esponse to exchange ate and activity changes. Fo the counties the espective changes in cuent account as a pecent of GDP will be: x c c c c c c c c c whee c is the desied change in the cuent account as a pecent of GDP to attain fundamental equilibium, γ is the cuent impact paamete and is the popotionate change in the eal effective exchange ate. In ode to tanslate the changes in eal effective exchange ates into the coesponding changes needed in what makets and policymakes actually obseve bilateal exchange ates against the numeaie dolla the system must identify the elationships between bilateal exchange ate changes eal effective exchange ate changes. Abstacting fom any induced changes in inflation, these will depend on tade pattens and the extent of appeciation of patnes. If the numeaie exchange ate is that of county the deficit county o fo simplicity, the dolla, the set of effective exchange ate will be:

,,,,,,,,,,,,,,,, whee is the pecent ise in the bilateal exchange ate of the county against the dolla, and ij is the shae of county j in total tade tunove of county i. Fo county, in this case the United States, the effective exchange ate falls when the foeign exchange ates ise against the dolla; hence the negative signs on nominal exchange ates to. Thee is no bilateal exchange ate change fo county because the numeaie cuency the dolla does not change against itself. The system ultimately has only nine unknowns to but ten independent equations and is hence ove-detemined. It can be shown as: c c

,, c In matix fom,,,,,,............... Thus, x x x x Z I R x x x Z B R whee x x x I B It is necessay to delete one ow fom the vecto of eal exchange ate changes and the adjusted tade matix: namely, the ow fo the county selected to be teated esidually. The tuncated adjusted tade shae matix will be. B The solution fo the set of exchange ate changes against the dolla needed to aive at FEERs is then obtained as follows, x x R B Z The vecto of eal effective exchange ate changes is detemined exogenously and is equal to the set of county cuency change tagets c i divided by the county adjustment impact paametes i.

Figue Bilateal Exchange Rates Index = pecisis =. postcisis =. Figue Fundamental Equilibium Exchange Rates Index = pecisis =. postcisis =. In pe-cisis peiod, the standad deviation within the bilateal exchange ates index is vey low,., compaed elatively to the post-cisis standad deviation of. Figue.. In the post-cisis peiod, the standad deviation within the FEER index is., compaed elatively to the post-cisis standad deviation of. Figue.. When we examine the deviations of the fundamental equilibium exchange ates FEER index, the plots show that in the pe-cisis peiod, all the Asian cuencies wee actually flying-in-unison with each othe. Howeve, afte the cisis, these cuencies wee dispesed, as being attacked by a hawk, and began to deviate in a lage ange Figue.. Figue Deviations of the FEER Index

Deviations of the FEER Index - - - - - - - INDONESIA CHINA HONG KONG JAPAN MALAYSIA PHILIPPINES KOREA SINGAPORE THAILAND

Figue Compaing the Fundamental Equilibium Exchange Rates and the Bilateal Exchange Rates Indices Indonesia China NC/USD FEER Bilateal Exchange Rate FEER Bilateal Exchange Rate Hong Kong Japan NC/USD NC/USD FEER Bilateal Exchange Rate FEER Bilateal Exchange Rate Malaysia Philippines NC/USD NC/USD FEER Bilateal Exchange Rate FEER Bilateal Exchange Rate Koea Singapoe NC/USD NC/USD FEER Bilateal Exchange Rate FEER Bilateal Exchange Rate Thailand NC/USD FEER Note: NC is national cuency. Bilateal Exchange Rate

APPENDIX II Computation of the Centipetal and Centifugal Foce in Degees Indonesia Yea FEER CA/GDP% distance dfeer dcagdp velocity CP/CF foce Degee.............................................................................................................................. Malaysia Yea FEER CA/GDP% distance dfeer dcagdp velocity CP/CF foce Degee.............................................................................................................................. Notes: CP is centipetal foce and CF is centifugal foce

APPENDIX II cont d Computation of the Centipetal and Centifugal Foce in Degees Philippines Yea FEER CA/GDP% distance dfeer dcagdp velocity CP/CF foce Degee.............................................................................................................................. Singapoe Yea FEER CA/GDP% distance dfeer dcagdp velocity CP/CF foce Degee.............................................................................................................................. Notes: CP is centipetal foce and CF is centifugal foce

APPENDIX II cont d Computation of the Centipetal and Centifugal Foce in Degees Thailand Yea FEER CA/GDP% distance dfeer dcagdp velocity CP/CF foce Degee.............................................................................................................................. Japan Yea FEER CA/GDP% distance dfeer dcagdp velocity CP/CF foce Degee.............................................................................................................................. Notes: CP is centipetal foce and CF is centifugal foce

APPENDIX II cont d Computation of the Centipetal and Centifugal Foce in Degees Koea Yea FEER CA/GDP% distance dfeer dcagdp velocity CP/CF foce Degee.............................................................................................................................. China Yea FEER CA/GDP% distance dfeer dcagdp velocity CP/CF foce Degee.............................................................................................................................. Notes: CP is centipetal foce and CF is centifugal foce

APPENDIX II cont d Computation of the Centipetal and Centifugal Foce in Degees HK Yea FEER CA/GDP% distance dfeer dcagdp velocity CP/CF foce Degee.............................................................................................................................. Notes: CP is centipetal foce and CF is centifugal foce