BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 2/2012:
De facto currency baskets of China and East Asian economies: The rising weights
Ying Fang ()
, Shicheng Huang and Linlin Niu
Abstract: We employ Bayesian method to estimate a time-varying
coefficient version of the de facto currency basket model of Frankel and
Wei (2007) for the RMB of China, using daily data from February 2005 to
July 2011. We estimate jointly the implicit time-varying weights of all 11
currencies in the reference basket announced by the Chinese government. We
find the dollar weight has been reduced and sometimes significantly smaller
than one, but there is no evidence of systematic operation of a currency
basket with discernable pattern of significant weights on other currencies.
During specific periods, the reduced dollar weight has not been switched to
other major international currencies, but to some East Asian currencies,
which is hard to explain by trade importance to or trade competition with
China. We examine currency baskets of these East Asian Economies, including
major international currencies and the RMB in their baskets. We find an
evident tendency of Malaysia and Singapore to increase the weights of RMB
in their own currency baskets, and a steadily and significantly positive
weight of RMB in the basket of Thailand. These evidences suggest that, the
positive weights of some East Asian currencies in RMB currency basket
during specific periods largely reflect the fact that these East Asia
economies have been systematically placing greater weights on RMB under the
new regime of RMB exchange rate.
Keywords: RMB currency basket; time-varying regressions; East Asia; China; US; (follow links to similar papers)
JEL-Codes: C11; F31; F41; (follow links to similar papers)
28 pages, February 23, 2012
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