The Impact of Global Financial Crisis on The Monetary ...projects.chass.utoronto.ca/link/jichouoct2809.pdf · to improve domestic financial systems and toto improve domestic financial

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.


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


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.


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.


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.


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.


SYNCHRONIZATION

We disentangle the question by investigating the business cyclical synchronization beforethe business cyclical synchronization before and after encountering the global financial crisiscrisis.


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)


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.


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.


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.


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)


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.


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


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


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


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


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


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


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


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


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


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


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



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


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


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


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


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


Impulse response of M1to US IP Shock

100

120

140

0

40

60

80

001234

0

20

40 4567

-60

-40

-20 8910111112


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


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


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



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


Impulse Response of CPIto G4 IP Shocks

60

70

80

US

30

40


10

20


-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


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


US Japan Euro China

43

Impulse Response of exportto G4 IP Shocks

200

250

US

50

100


-50

0


-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


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


Impulse Response of policy interest rate to G4 IP Shocks

15

20

US

10

JapanEuroChinaHong Kong

0


-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


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


Impulse Response of stock market to G4 IP Shocks

500

600

S&P500

400

S&P500JapanShanghai AShanghai B

200


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


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.


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.


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.


Main Findings

This result shows that US still plays an important role in leading the global economyimportant role in leading the global economy recovery.


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.


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.


ConclusionsConclusions

Our findings imply that there has been a remarkably increase in the degree of cyclicalremarkably increase in the degree of cyclical synchronization.


Conclusions

There are decoupling on some variables in East Asian.East Asian.


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)


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.


Conclusions The single currency in Asia is only possible at

a later stage of political integration.a later stage of political integration.


ENDEND

Documents

The Impact of Global Financial Crisis on The Monetary ...projects.chass.utoronto.ca/link/jichouoct2809.pdf · to improve domestic financial systems and toto improve domestic financial