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How do the Renminbi and other East Asian currencies co-move?

Keddad, Benjamin (2016): How do the Renminbi and other East Asian currencies co-move?

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Abstract

This paper investigates the degree and the nature of exchange rate co-movements between the Renminbi and a set of seven East Asian currencies by estimating Markov switching models with regime-dependent correlations and time-varying transition probabilities. These models have several advantages. First, exchange rate co-movements can vary across different depreciation and appreciation regimes. Second, the Renminbi can act as a transition variable that provides information regarding how the exchange rates evolve over time. After controlling for global effects and exchange market pressures, the results yield robust evidence of the Renminbi's rising role in East Asia as a significant factor in currency fluctuations. A key result is that regional currencies tend to overreact when the Renminbi depreciates and underreact when it appreciates, suggesting that East Asian economies are not willing to allow their currencies to substantially appreciate against the Chinese currency. Finally, trade transactions and competition as well as financial flows demonstrate significant explanatory power regarding currency movements against the Renminbi -- particularly during episodes of smaller exchange rate fluctuations.

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