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The Impact of Global Financial Crisis on The Monetary Integration
in East Asianin East Asian
Ji Chou
Ming-Huan Liou
October 28 2009October 28, 2009
INTRODUCTION
Prior to the 1997 financial crisis, the official exchange rate policy of many East Asian economiesof many East Asian economies adopted U.S. dollar peg systems.
世新大學經濟系 周濟 2
INTRODUCTIONI th A i fi i l i i 1997 In the Asian financial crisis 1997-1998, the region experienced a , g psudden reversal of international capital outflow in manycapital outflow in many countries.
世新大學經濟系 周濟 3
INTRODUCTIONThe region attempted to find a suitable The region attempted to find a suitable exchange rate system and to deepen fi i l ti d i t ti t thfinancial cooperation and integration at the regional level.
European monetary integration attracts Asian attention
The theory of “optimum currency areas” is the criteria to checkthe criteria to check
世新大學經濟系 周濟 4
INTRODUCTION Mundell (2005) argued that there are many benefits
from Asian monetary integration : greater trade and investment; alternatives for countries forced out of the US dollar area; stronger voice in world affairs; stronger voice in world affairs; cushion in crises; avoidance of exchange rate conflict; g ; better monetary policy; reduced destabilizing speculation; regional decision making; a more efficient Asian economy.
世新大學經濟系 周濟 5
INTRODUCTION
So far, Asian economies took various steps to improve domestic financial systems and toto improve domestic financial systems and to promote capital account liberalization, (Lee 2008) including:2008) including: ASEAN Surveillance Process,
Chi M i I iti ti Chiang Mai Initiative, Asian Bond Markets Initiative, Asian Bond Fund.
世新大學經濟系 周濟 7
INTRODUCTION
The hit of global financial crisis on Asian economies is much broader and deeper thaneconomies is much broader and deeper than the Asian financial crisis of 1997–1998. (ADB 2009)2009)
It also provides the opportunity to reexamine th t i t ti i E t A ithe monetary integration in East Asia.
世新大學經濟系 周濟 8
INTRODUCTION
The paper casts on the question of whether the global financial crisis is a catalyst orthe global financial crisis is a catalyst or hindrance for monetary integration in East AsiaAsia.
世新大學經濟系 周濟 9
SYNCHRONIZATION
We disentangle the question by investigating the business cyclical synchronization beforethe business cyclical synchronization before and after encountering the global financial crisiscrisis.
世新大學經濟系 周濟 10
SYNCHRONIZATION
Since the higher the correlation of business cycles, the lower the stabilization cost ofcycles, the lower the stabilization cost of giving up an independent monetary policy. (Furceri and Karras 2008)(Furceri and Karras, 2008)
世新大學經濟系 周濟 11
SYNCHRONIZATION
If a member economy’s business cycle is very highly correlated with the union-widevery highly correlated with the union wide cyclical output,
then monetary policy conducted by the then monetary policy conducted by the common central bank will be a very close
b tit t f th t ’ i d d tsubstitute for the country’s own independent monetary policy.
世新大學經濟系 周濟 12
MODEL
We investigate the impact of the global financial crisis on the monetary integration infinancial crisis on the monetary integration in East Asia by means of a large-scale structural dynamic factor modelstructural dynamic factor model.
世新大學經濟系 周濟 13
MODEL
This framework allows us to simultaneously assess the responses of a large set of realassess the responses of a large set of real and nominal variables
and investigate the role of transmission and investigate the role of transmission channels such as shocks from market
l tilit d i d t i l d tivolatility and industrial production.
世新大學經濟系 周濟 14
MODEL
Following Stock and Watson (2005), consider a dynamic factor model:a dynamic factor model:
Two global (common) factors are selected Two global (common) factors are selected.(Bai and Ng (2002) information criteria)
世新大學經濟系 周濟 1515
Data
This paper rely on a large data set with 111 variables and the observation of 115 monthsvariables and the observation of 115 months from 2000M1 through 2009M7.
世新大學經濟系 周濟 1616
Data13 Economies
G4 Asian Four Tigers ASEAN5
13 Economies
US Hong Kong Indonesia
Japan Korea Malaysia
Euro Singapore Philippines
China Taiwan ThailandChina Taiwan Thailand
Vietnam
世新大學經濟系 周濟 1717
DataKey VariablesKey Variables
1. industrial production (IP)h di t d i t2. merchandise export and import
3. unemployment rate4. consumer price index (CPI)5. money supply (M1)y y ( )6. policy interest rate7 real effective exchange index (REER)7. real effective exchange index (REER)8. stock market price
世新大學經濟系 周濟 1818
Impulse Response Analysis- Over 12-month horizon- Over 12-month horizon
Impulse response of stock market to CBOE Market Volatility Index (VIX)CBOE Market Volatility Index (VIX) Shock
-0.10
0.00
0
-0.30
-0.20 1234
-0.50
-0.40 4567
-0.70
-0.60 8910111112
世新大學經濟系 周濟 2121
Impulse response of Industrial Production (IP) to VIX Shock
0.05
0.1
0
0 05
01234
-0.1
-0.05 4567
-0.2
-0.15 8910111112
世新大學經濟系 周濟 2222
Impulse response of real effective exchange rate (REER)effective exchange rate (REER) to VIX Shock
0.15
0.2
0.25
0
0
0.05
0.1
0 51234
-0.1
-0.05
0 4567
-0.25
-0.2
-0.15 8910111112
世新大學經濟系 周濟 2323
Impulse response of exportto VIX Shock
0.10.15
0.2
0
-0.050
0.05 1234
-0.2-0.15
-0.14567
-0.35-0.3
-0.25 8910111112
世新大學經濟系 周濟 2424
Impulse response of importto VIX Shock
0.1
0.15
0.2
0
0 05
0
0.05
01234
-0.15
-0.1
-0.05 4567
-0.3
-0.25
-0.2 8910111112
世新大學經濟系 周濟 2525
Impulse response of M1to VIX Shock
0 04
0.06
0.08
0
0
0.02
0.041234
0 06
-0.04
-0.024567
-0.1
-0.08
-0.06 8910111112
世新大學經濟系 周濟 2626
Impulse response of CPIto VIX Shock
0
0.02
0
0 06
-0.04
-0.02 1234
-0.1
-0.08
-0.06 4567
-0.14
-0.12
0.18910111112
世新大學經濟系 周濟 2727
Impulse response of policy interest rate to VIX Shock
-0.01
0
0
0 03
-0.021234
-0.04
-0.03 4567
-0.06
-0.05 8910111112
世新大學經濟系 周濟 2828
Impulse response of unemployment rate to VIX Shock
0.015
0.02
0
0.01
0 0 51234
0.005
4567
-0.005
0 8910111112
世新大學經濟系 周濟 2929
Impulse Response Analysis- Over 12-month horizon- Over 12-month horizon
US IP Shock
Impulse response of IPto US IP Shock
100
120
40
60
80 0
1
2
3
0
20
40 4
5
6
7
-40
-20
0 8
9
10
11
12
世新大學經濟系 周濟 3131
Impulse response of real effective p pexchange rate (REER) to US IP Shock
100
150
50
000
1
2
3
0 4
5
6
7
-100
-50 8
9
10
11
12
世新大學經濟系 周濟 3232
Impulse response of exportto US IP Shock
150
200
250
50
100
150 0
1
2
3
100
-50
04
5
6
7
-200
-150
-100 8
9
10
11
12
世新大學經濟系 周濟 3333
Impulse response importto US IP Shock
200
250
50
100
150 0
1
2
3
-50
0
50 4
5
6
7
-150
-100
508
9
10
11
12
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Impulse response of CPIto US IP Shock
60 70 80
0
30 40 50 1
234
0 10 20
4567
-30 -20 -10 8
910111112
世新大學經濟系 周濟 3535
Impulse response of M1to US IP Shock
100
120
140
0
40
60
80
001234
0
20
40 4567
-60
-40
-20 8910111112
世新大學經濟系 周濟 3636
Impulse response of policy interest rate to US IP Shock
13
18
3
8
0
1
2
3
-2
3 4
5
6
7
-12
-78
9
10
11
12
世新大學經濟系 周濟 3737
Impulse response of stock market price to US IP Shock
400
500
300
400 0
1
2
3
200 4
5
6
7
0
100 8
9
10
11
12
世新大學經濟系 周濟 3838
Impulse response of l t t t US IPunemployment rate to US IP
ShockShock2
4
4
-2
00123
-8
-6
-4 3456
-12
-1078910-14 101112
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Impulse Response Analysis- Over 12-month horizon- Over 12-month horizon
Comparison of IP Shocks from US, Japan, EURO and China (G4)
Impulse Response of IPto G4 IP Shocks
90
110
US
50
70
90 JapanEuroChinaHong Kong
30
50 Hong KongSingaporeKoreaTaiwan
-10
10 ThailandIndonesiaMalaysiaPhilippines
-30 0 2 4 6 8 10 12 1 3 5 7 9 11 0 2 4 6 8 10 12 1 3 5 7 9 11
US Japan Euro China
PhilippinesVietnam
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Impulse Response of CPIto G4 IP Shocks
60
70
80
US
30
40
50 JapanEuroChinaHong Kong
10
20
30 Hong KongSingaporeKoreaTaiwan
-20
-10
0 ThailandIndonesiaMalaysiaPhilippines
-30 0 2 4 6 8 10 12 1 3 5 7 9 11 0 2 4 6 8 10 12 1 3 5 7 9 11
US Japan Euro China
PhilippinesVietnam
世新大學經濟系 周濟 4242
Impulse Response of real ff ti h t t G4 IPeffective exchange rate to G4 IP
ShocksShocks150
50
100 USJapanEuroChina
0
50 ChinaHong KongSingaporeKorea
-50
TaiwanThailandIndonesiaMalaysia
-1000 2 4 6 8 10 12 1 3 5 7 9 11 0 2 4 6 8 10 12 1 3 5 7 9 11
US J E Chi
MalaysiaPhilippines
世新大學經濟系 周濟 43
US Japan Euro China
43
Impulse Response of exportto G4 IP Shocks
200
250
US
50
100
150 JapanEuroChinaHong Kong
-50
0
50 Hong KongSingaporeKoreaTaiwan
-150
-100ThailandIndonesiaMalaysiaPhilippines
-2000 2 4 6 8 10 12 1 3 5 7 9 11 0 2 4 6 8 10 12 1 3 5 7 9 11
US Japan Euro China
PhilippinesVietnam
世新大學經濟系 周濟 4444
Impulse Response of importto G4 IP Shocks
200
250
50
100
150 USJapanEuroChina
-50
0
50Hong KongSingaporeKoreaTaiwan
-150
-100ThailandIndonesiaMalaysiaPhilippines
-2000 2 4 6 8 10 12 1 3 5 7 9 11 0 2 4 6 8 10 12 1 3 5 7 9 11
us Japan Euro China
Vietnam
世新大學經濟系 周濟 4545
Impulse Response of policy interest rate to G4 IP Shocks
15
20
US
10
JapanEuroChinaHong Kong
0
5 Hong KongSingaporeKoreaTaiwan
-5
ThailandIndonesiaMalaysiaPhilippines
-10 0 2 4 6 8 10 12 1 3 5 7 9 11 0 2 4 6 8 10 12 1 3 5 7 9 11
us Japan Euro China
PhilippinesVietnam
世新大學經濟系 周濟 4646
Impulse Response of M1to G4 IP Shocks
100
120
140
US
60
80
100JapanEuroChinaHong Kong
0
20
40Hong KongSingaporeKoreaTaiwan
-40
-20
0ThailandIndonesiaMalaysiaPhilippines
-600 2 4 6 8 10 12 1 3 5 7 9 11 0 2 4 6 8 10 12 1 3 5 7 9 11
us Japan Euro China
PhilippinesVietnam
世新大學經濟系 周濟 4747
Impulse Response of stock market to G4 IP Shocks
500
600
S&P500
400
S&P500JapanShanghai AShanghai B
200
300 Hong KongSingaporeKoreaTaiwan
100
TaiwanThailandIndonesiaMalaysia
00 2 4 6 8 10 12 1 3 5 7 9 11 0 2 4 6 8 10 12 1 3 5 7 9 11
us Japan Euro China
Philippines
世新大學經濟系 周濟 4848
Impulse Response of l t t t G4 IPunemployment rate to G4 IP
ShocksShocks
0
2
4
-2
0
US
8
-6
-4JapanEuroHong KongSi
12
-10
-8 SingaporeKoreaTaiwanPhilippines
-14
-12
0 2 4 6 8 10 12 1 3 5 7 9 11 0 2 4 6 8 10 12 1 3 5 7 9 11
pp
世新大學經濟系 周濟 49us Japan Euro China
49
Variance Decomposition-12-month ahead-12-month ahead
Variance Decomposition explained by Global Factors
it %Before crisis: 2000M1 - 2007M6
unit:%Industrial Interest Money
Production Rate SupplyREERImportEconomy CPIExport
United States 36.5 7.8 40 48.9 30 16.4 53.9Japan 15.5 36.9 25.3 27.8 6.1 46 18.2Euro 27.5 29.7 29.7 55.7 22.2 41.9 18.2
China 5.8 9.4 19 24.1 15.2 25.4 33.7Hong Kong 3.8 9.1 12.2 48.7 22.6 33.2 19.5Singapore 21.6 20.9 13.3 58.9 3.8 78.3 52.2g p 21.6 20.9 13.3 58.9 3.8 78.3 52.2
Korea 18.4 12.5 25.8 26.3 19.2 36.2 18.4Taiwan 16.1 17.9 14.9 39.4 10.6 12.3 54.3
Indonesia 43 6 19 5 35 2 36 8 16 4 9 6 19 1Indonesia 43.6 19.5 35.2 36.8 16.4 9.6 19.1
Malaysia 11.2 9.6 12.5 45.5 34.3 27 52
Philippines 45.3 16.9 27.7 62 43.4 27.9 48.8
5151
Thailand 27.6 17.7 22.5 75.3 29.9 33 12
Vietnam 13.4 24.6 41.8 - 7.3 8.8 45.5
Variance Decomposition explained by Global Factors
unit:%After crisis 2000M1 - 2009M7
Industrial Interest Money
Production Rate SupplyUnited States 51.7 85.4 92.5 69.5 82 29.1 62.4
REERImport Economy CPIExport
51.7 85.4 92.5 69.5 82 29.1 62.4Japan 87.6 85.9 87.5 55.1 74.4 43.8 11.4Euro 88 74.5 74.4 13.4 87.4 67 14.9
China 49 3 64 78 8 34 9 63 1 70 7 59 7China 49.3 64 78.8 34.9 63.1 70.7 59.7Hong Kong 0.8 65.6 65 57.2 45.4 51.9 29Singapore 32.1 85 85.3 13.7 67.4 6 36.3
K 83 9 2 88 4 9 69 9 4 9Korea 83.5 79.2 88 54.9 69.9 75.4 9.5Taiwan 78.5 80.1 68.3 14.3 46.4 71.6 53.1
Indonesia 3.8 68.2 56.1 11.2 30.1 23.8 53.5
Malaysia 67.3 83.8 79.6 4.2 66.3 62.9 54.2
Philippines 31.2 72.9 76.3 4.8 64.7 41.7 18
Thailand 82 80.3 77.4 36.9 88.8 41.6 11.6
5252Vietnam 39.3 55.1 54.5 - 66.1 53.9 34.2
Variance Decomposition explained by Global FactorsGlobal Factors
unit:%After crisis - Before Crisis: (2000M1 - 2009M7) - (200M1 - 2007M6)
unit:%Industrial Interest Money
Production Rate SupplyUnited States 15 2 77 6 52 5 20 6 52 0 12 7 8 5
REERImportEconomy CPIExport
United States 15.2 77.6 52.5 20.6 52.0 12.7 8.5Japan 72.1 49.0 62.2 27.3 68.3 -2.2 -6.8 Euro 60.5 44.8 44.7 -42.3 65.2 25.1 -3.3 China 43 5 54 6 59 8 10 8 47 9 45 3 26 0China 43.5 54.6 59.8 10.8 47.9 45.3 26.0
Hong Kong -3.0 56.5 52.8 8.5 22.8 18.7 9.5Singapore 10.5 64.1 72.0 -45.2 63.6 -72.3 -15.9
Korea 65 1 66 7 62 2 28 6 50 7 39 2 8 9Korea 65.1 66.7 62.2 28.6 50.7 39.2 -8.9 Taiwan 62.4 62.2 53.4 -25.1 35.8 59.3 -1.2
Indonesia -39.8 48.7 20.9 -25.6 13.7 14.2 34.4
Mala sia 56 1 74 2 67 1 41 3 32 0 35 9 2 2Malaysia 56.1 74.2 67.1 -41.3 32.0 35.9 2.2
Philippines -14.1 56.0 48.6 -57.2 21.3 13.8 -30.8
Thailand 54.4 62.6 54.9 -38.4 58.9 8.6 -0.4
Vi t 25 9 30 5 12 7 58 8 45 1 11 3
5353
Vietnam 25.9 30.5 12.7 - 58.8 45.1 -11.3
Variance Decomposition explained byVariance Decomposition explained by Global Factors
Stock Market Index 2000M1-2007M6 2000M1-2009M7S&P 500 Index 55 77
Shanghai A Stock Index 78 83gShanghai B Stock Index 75 79
TSE Weighted Stock Index 75 78Indonesia JSX Index 48 73Indonesia JSX Index 48 73
Kuala Lumpur-Stock Index 82 86NK-225 Index 39 65
South Korea-Stock Index 42 72Hang Seng Index 54 87
Manila-Stock Index 53 68Bangkok Set Stock Index 35 76
Strait Times Index 66 83Average 55 74
54
Average 55 7454
Main Findings
The impulse responses of different economies to US financial disturbance overeconomies to US financial disturbance over 12-month horizon show a negative effect on industrial production activity in mostindustrial production activity in most countries.
世新大學經濟系 周濟 55
Main Findings
Despite there exists time lag and different response extent, VIX shock lowers the traderesponse extent, VIX shock lowers the trade variables permanently in all economies, except Euroexcept Euro.
世新大學經濟系 周濟 56
Main FindingsMain Findings
The rank of the effect strength of industrial production shocks among G4 economies areproduction shocks among G4 economies are US, Japan, Euro and China.
世新大學經濟系 周濟 57
Main Findings
This result shows that US still plays an important role in leading the global economyimportant role in leading the global economy recovery.
世新大學經濟系 周濟 58
Main Findings
From the variance decomposition analysis, most global factors explain a larger fraction ofmost global factors explain a larger fraction of variations in the crisis period than before the crisis periodcrisis period.
世新大學經濟系 周濟 59
Main Findings
However, after the global crisis on the real effective exchange rate in most Asianeffective exchange rate in most Asian emerging economy except China, Hong Kong and Koreaand Korea.
The global factor also plays smaller role on l i E J d i t fmoney supply in Euro, Japan, and six out of
nine on Asian emerging economies.
世新大學經濟系 周濟 60
ConclusionsConclusions
Our findings imply that there has been a remarkably increase in the degree of cyclicalremarkably increase in the degree of cyclical synchronization.
世新大學經濟系 周濟 61
Conclusions
There are decoupling on some variables in East Asian.East Asian.
世新大學經濟系 周濟 62
Conclusions Multiple-currency monetary union is most
politically feasible at this stage of integration.politically feasible at this stage of integration. Mundell (2005), Kawai (2008), Duan (2009)
世新大學經濟系 周濟 63
Conclusions The European Monetary Unit ( EMU) 1999-
2002, before the abolition of national2002, before the abolition of national currencies - the model Asian region can be adoptedadopted.
世新大學經濟系 周濟 64
Conclusions The single currency in Asia is only possible at
a later stage of political integration.a later stage of political integration.
世新大學經濟系 周濟 65
ENDEND
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