Pacific LVVU\JIHU.. uuvv,n., PEO/Structure.

Rate Fluctuations Macroeconomic

the Committee Pacific Economic 'V'UUVVA�.

June

The views those of the and do not reflect the view

The abstract maps used herein are for purposes are not taken from official sources and do not territorial and refer to the "''"''JHCHH.''_

PECC Member Committees. TABLE OF CONTENTS

I. PREFACE

II. OVERVIEW Introduction and Summary 3 Exchange Rate Fluctuations and Exchange Rate Arrangements 5 Long-Run Equilibrium Exchange Rate 11 Exchange Rates and Macroeconomic Stabilization 15 Conclusive Remarks 25 References 27 III. SUMMARIES OF INDIVIDUAL ECONOMIES Australia 28 Canada 30 Chile 31 China 33 Colombia 35 Hong Kong 37 Indonesia 39 Japan 41 Korea 43 Malaysia 45 Mexico 47 New Zealand 49 Peru 50 The Philippines 51 Russia 53 Singapore 55 Chinese Taipei 57 United States 59 Vietnam 61 IV. APPENDIX

V. SPECIALISTS ON STRUCTURAL ISSUES LIST OF TABLES AND FIGURES

Figure 1 Nominal Exchange Rates: Pacific Region, 1977-96 Table 1 Exchange Rates Arrangements: Pacific Region, 1980-96 Figure 1 Nominal Exchange Rates: Pacific Region, 1977-96 Table 1 Exchange Rates Arrangements: Pacific Region, 1980-96 Figure 2 Real Effective Exchange Rates: Pacific Region, 1986-96 Table 2 Estimates of Equilibrium Dollar Exchange Rate Figure 3 Real Exchange Rates and Economic Growth: APEC Region, 1973-95 Figure 4 Manufacturing Shares in Exports and Imports: Pacific Region, 1970 through 1993 Figure 5 Non-Tradable Prices and Economic Growth Figure 6 Inflation and its Volatility: Pacific Region, 1981-85, 86-90, 91-95 Figure 7 Degree of Openness: Pacific Region, 1980-95 Figure 8 International Bank and Securities Financing: Asia and Latin America, 1991-95 Figure 9 Interest Rates in the Industrialized Countries and Equity Prices in the Emerging Markets, 1993-96 Figure 10 Capital Inflow and Foreign Exchange Market Intervention: Chile, Korea, Malaysia, and the Philippines, 1990/9 1-94/95 Figure 11 Real Exchange Rate Elasticities of Exports and Imports: APEC region, 1973-93 Figure 12 Income Elasticities of Exports and Imports: APEC region, 1973-93 Figure 13 Exchange Rate Changes and Foreign Direct Investment: Japan, 1965-94 Figure 14 Effects of U.S. Dollar and Yen Exchange Rate Changes on Net Exports Figure 15 Nominal vs. Real Exchange Rate Volatilities: Pacific Region, 1986-90 and 1991-95 Figure 16 Degree of Financial Deepening: Pacific Region, 1980-95 Figure 17 U.S. Dollar Share of Foreign Exchange Reserves, International Assets and G-lO GDP

APPENDIX Figure Al Growth Rates: Pacific Region, 1981-95 Figure A2 Inflation: Pacific Region, 1981-95/96 Table Al Nominal Exchange Rates Table A2 Real Effective Exchange Rates Table A3 Manufacturing Shares in Exports and Imports Table A4 Inflation and its Volatility Table A5 Degree of Openness Table A6 Degree of Financial Deepening PREFACE

This report on Exchange Rate Fluctuations consists of summary reports of individual and Macroeconomic Management is the sixth countries/regions submitted by specialists from report in a series of studies conducted by each PECC member economy. Pacific Economic Outlook/Structural Issues The report is a summary of studies (PEO/Structure). PEO/Structure is one of the conducted by these specialists under the two study groups within PEO, which itself is coordination of Professor Akira Kohsaka, one of the task forces under the Pacific Osaka University, Osaka, Japan. The group Economic Cooperation Council (PECC). held two meetings in 1996 in Osaka, hosted by PEO/Structure deals with longer-term structural the Japan Committee for Pacific Economic issues in the region, while its twin, PEOlForecast, Outlook. The Committee has been sponsored is concerned with short-term forecasts. by the Japanese Ministry of Foreign Affairs The purpose of this report is to review the and business communities in Kansai region. pattern and nature of exchange rate changes in Ambassador N obuo Matsunaga serves as the region in the past two decades, to address to Chairman of the Japan Committee for Pacific the main issues the policy authorities are Economic Outlook. Mr. Masumi Ishikawa, confronting, and to provide medium-term Deputy Executive Director of the Committee policy implications for the corning years. The Secretariat, coordinates the management of first part provides an overview of the issues in PEO/Structure. the region as a whole, and the second part

Exchange Rate Fluctuations and Macroeconomic Management 1 PACIFIC ECONOMIC COOPE RATION COUNCIL

The Pacific Economic Cooperation Council Capital and Financial Markets; Fisheries (PECC) is a tripartite non-governmental Development and Cooperation; Human organization committed to promoting Resource Development; Pacific Islands Nations; economic cooperation in the Pacific Rim. It Science and Technology; Minerals and Energy, comprises representatives from 22 Asia-Pacific Telecommunications, Transport, Tourism, Food economies* who meet regularly to work on and Agriculture Trade Policy as well as Pacific practical government and business policy issues Economic Outlook. to increase trade, investment and economic PECC actively seeks participation from the development in the region. World Trade Organization, the OECD, the It is the only organization in the region that Asian Development Bank, the World Bank, and brings business, government and researchers United Nations Agencies as well as APEC together on an equal footing to address key officials. trade and investment issues. Though it has an For more information on PECC, please independent agenda, PECC maintains direct contact the PECC International Secretariat. links to governments in the region to enable its work to be channeled to Ministers and Address: 4 Nassim Road, Singapore 258372 policymakers. Phone: 65-737-9823; Fax: 65-737-9824 PECC's substantive work program is carried out E-mail: [email protected] by a range of forums, task forces and project PECC Home Page: http://www.pecc.net groups. These operates in such area:

*22 PECC economies: Australia, Brunei, Canada, Chile, China, Colombia, Hong Kong, Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand, Pacific Nations Islands, Peru, The Philippines, Russia, Singapore, Chinese Taipei, Thailand, the United States, Vietnam

[This section is based on the PECC Home Page.]

2 Pacific Economic Outlook, PEO/Structure OVERVIEW

INTRODUCTION AND SUMMARY of increasing economic interdependence through the higher mobility of products and production PEO/Structure has conducted studies on Trade in factors. This is the very theme we will scrutinize, Goods and Services and Capital Flows in the particularly highlighting macroeconomic Pacific region, where we have shared in common management issues facing exchange rate closer concerns with the recent trend of increasing fluctuations. interdependence through goods/services and With these considerations in mind, the capital flows. The present topic of exchange rate objectives of this Overview are to review the management is meant to be along the same line or pattern and nature of exchange rate changes in the its extension. region in the past two decades, to address to the In the first half of the 1990s, emerging markets main issues the policy authorities are confronting, in the Pacific region experienced booms and busts and to provide medium-run policy implications of capital inflows from industrial countries. One for the coming years. can point out a few structural changes in the What we have learned from the Pacific international capital market since the former experience can be summarized as follows: Mexican crisis in 1982 (refer to PEO/Structure, The region contains a variety of exchange rate Capital Flows in the Pacific Region, 1995). arrangements from a classical peg to a free float, The Mexican crisis in 1994 exposed the reality where we find a few distinct groups among them. where of how foreign capital inflows can be a This reflects not only different economic double-edged sword to economic management of structures of the member economies, but also their developing economies. The more integrated they different development stages and histories. In the become, the more likely their domestic policy last two decades we have witnessed large authorities suffer from external disturbances. Now fluctuations of nominal as well as real effective the authorities have become better aware of the exchange rates in the short run and their fairly importance of: (1) how to cope with actual and/or large swings in the long run. potential exchange rate fluctuations; and (2) either Although exchange rate stability is one of how to or how not to adjust exchange rates under macroeconomic policy targets, it is not at all easy the given structural characteristics of their to precisely pinpoint what is equilibrium level of markets, such as underdevelopment, institutional exchange rates. In fact, there seems to be no rigidities, etc. consensus on the long-run trend of exchange rates. As one of the solutions to the impact of volatile Nor we can predict the general long-run foreign capital flows, a mutual lending scheme of equilibrium level of exchange rates. Because there official foreign exchange reserves has been is no monotonous relationship between economic recently made effective among some monetary growth and long-run exchange rates as revealed authorities in the region. This makes, however, by the experiences of member economies in the only part of the efforts in macroeconomic region. Thus, considering equilibrium exchange management which must confront the new reality rates as depending on market conditions and

Exchange Rate Fluctuations and Macroeconomic Management 3 It does not

"'"'"'v"'U')','" rate swings may have

a.�,"r"" '" in the

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Pacific Economic Outlook, PEO/Structure EXCHANGE RATE FLUCTUATIONS AND same holds true for Canada to a far lesser degree. EXCHANGE RATE ARRANGEMENTS The Japanese yen, however, has exhibited a strong appreciation trend since 1985. Nominal Exchange Rate Movements Latin American PECC economies have Figure 1 shows the movements of nominal historically experienced hyper-depreciation. In exchange rates against the U.S. dollar across four fact, during 1977-90, the Peruvian new sole groups of economies in the Pacific region for the depreciated to less than 1/1,000,000 against the period of 1977 through 1996. The developed dollar, and even the Chilean peso depreciated into economies (Australia, Canada, Japan, and New one tenth of the initial value. In East Asia, the Zealand) have been under the free float, and their Indonesian rupiah and the Philippine peso nominal exchange rates against the dollar had in depreciated to a significant degree up to 1985, and common a turnaround in 1985-86. While Australia have been more or less stabilized in the 1990s. and New Zealand both experienced continuous The Hong Kong dollar, the Korean won and the currency depreciation up to that point in their Malaysian ringgit have shown the same patterns, respective transition processes to the free float, but to a lesser degree. In contrast, the Singapore there have not existed any trends of either dollar and the Chinese Taipei's NT dollar seem to depreciation nor appreciation since then. The have shown long-run appreciation against the U.S.

Figure 1 NOMINAL EXCHANGE RATES: PACIFIC REGION, 1977-96

(US$/currency) 180

160 --- Australia �Canada ' 140 •• 6- •.Japan .6

-- New Zealand .1;' :5 120 ' ,6 o" m � 100

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Exchange Rate Fluctuations and Macroeconomic Management 5 1000000000

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Pacific Economic PEO/Structure shown a trend of or

economy.

Exchange Rate Fluctuations and Macroeconomic Management Table 1

Peru

Source: Note:

Pacific Economic Outlook, PEO/Structure eXloec:tatlOn and to make

is but a one.

economIes.

Exchange Rate Fluctuations and Macroeconomic Management · -

Pacific Economic Outlook, PEO/Structure LONG-RUN EQUILIBRIUM EXCHANGE RATES macroeconomic fundamentals. A number of studies suggest the mean-reverting nature of Equilibrium Exchange Rates actual rates as well as of deviations from Since the collapse of the Bretton Woods regime, estimated equilibrium exchange rates. This we have witnessed exchange rates easily moving implies that there seems to be a strong out of line with economic fundamentals even in fundamental arbitrage mechanism in international the medium-run (say quarterly or longer), namely transactions with both goods and financial assets. currency misalignments for a prolonged period. It Without the benefit of hindsight, however, it is true, however, that it is generally not easy to would be generally hard to determine what exactly identify misalignments or a deviation exactly is the equilibrium level of exchange rates. from the fundamental relationship between the Accordingly, one may make a very large equilibrium exchange rate and other prediction error (say, the order of 20 percent or macroeconomic variables. Table 2, for illustration, more) in claiming the long-run equilibrium level shows actual and four estimated equilibrium of exchange rates by calculating productivity­ exchange rates based on three alternative adjusted PPP or other fundamental rates. It does hypotheses on long-run exchange rate not necessarily mean, however, that one could not determination. correctly predict the future course of the long-run Apparently, the Table implies the non­ equilibrium exchange rate. Can something existence of a consensus on the equilibrium definite be concluded about the long-run exchange rate, although one may note the movement of real exchange rates? Drawing on the closeness of the two estimates among the four, i.e. recent research by Ito, Isard, and Symansky between the productivity-adjusted PPP [1997], we can make the following observations. (Purchasing Power Parity) and the one based on

Table 2 ESTIMATES OF EQUILIBRIUM DOLLAR EXCHANGE RATE

Estimates of the US dollar's purchasing power parity and fundamental equilibrium value

Market Purchasing PPP Fundamental rate* power parity adjusted for equilibrium (PPP) productivity exchange rate

OEeD Penn Goldman Sachs l iE

Deutsche Mark against the dollar 1.53 2.10 2.12 1.41 1.45-1.50 Yen against the dollar 107 18 4 188 107 100

* On 15th May 1996. Sources: OEeD, Penn World Tables 5.6, Goldman Sachs and John Williamson's informal update

of estimates in Estimating equilibrium exchange rates, Institute for International Economics (liE), Washington, D.C. (September 1994).

Exchange Rate Fluctuations and Macroeconomic Management 11 Pacific Economic Outlook, PEO/Structure :: : : : : : : : : : : : : : :: : 80 : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : :: : : : : : : : : : : : : : "� : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : :: : : : :: : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : :: : : : : :

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1

Pacific Economic Where are we now? The bottom line is that international market. Then, nominal exchange there is no unique, monotonous relationship rates could literally give a nominal anchor to between real exchange rates and economic domestic monetary developments. In Hong Kong growth in the long run, because both tradables monetary policies have been bound to the and non-tradables have changing compositions exchange rate target, while Singapore allows and different productivity growth between and exchange rates to move under close surveillance. within themselves in the long run. The fact that Other economies with more or less harsh one cannot generally predict in what direction the inflation episodes in the las! two decades (Latin real equilibrium exchange rate will proceed in the American members, Indonesia and the Philippines long run, however, does not necessarily deny the in East Asia) have seemed to utilize exchange rate importance of the effects of exchange rate management as an important instrument to fight changes on other macroeconomic variables. off domestic inflation. Some countries, particularly those in Latin America in the 1980s, tried to fix nominal exchange rates as a nominal EXCHANGE RATES AND MACROECONOMIC anchor to control inflation, but had difficulties, STABILIZATION because, with resulting persistent real exchange rate appreciation, they could not convince the Macroeconomic Targeting public on the sustainability of these exchange It is well known that exchange rate arrangements rates. are crucial to the choice of macroeconomic policy A crawling peg with band is presumed to make targeting. Under a fixed exchange rate regime use of the merits of both flexible exchange rates with high capital mobility as in Hong Kong, and stable real exchange rates. Chile, Colombia, monetary independence has to be abandoned, and Indonesia (and Russia) have recently adopted which implies that there would be no room left for the scheme. Crawling or continual small domestic interest rates to be used as policy adjustments in an exchange rate would be instruments. Meanwhile, under a freely floating necessary to compensate for inflation differentials rate with high capital mobility, we would argue if the domestic inflation rate is expected to be that exchange rate targeting could endanger the persistently higher than those of the trading internal balance, which might have really been the partners for the foreseeable future. Pegging or case in the late 1980s in Japan. How can the target fixing an exchange rate against a single foreign of macroeconomic stabilization be achieved under currency or a basket of currencies in some different exchange rate arrangements in the duration would be indispensable to anchor Pacific region? inflationary expectation by pronouncing official In some economies in East Asia with commitment to the exchange rate stability. And comparatively good records in inflation control finally, a "band" would be preferable for the (Asian NIEs and some ASEAN economies), they exchange rate to adjust to short-run disturbances seem to have been able to maintain some to a certain degree, without eroding public equilibrium levels of real effective exchange rates confidence in the parity rate. compatible with some sustainable levels of In order for a band crawling peg to be external imbalances (either surplus or deficit). successful, however, the parity or the central rate Since these economies have been successful in must be set at a sustainable level. Otherwise, the keeping domestic inflation moderate, all they pegged exchange rate system is always prone to a have to do is to control both prices (managing speculative attack in a one-sided way. As nominal exchange rates) and quantities of foreign illustrated in Figure 6, the higher the inflation rate, capital flows (occasional capital controls). In fact, the more volatile it would be. Therefore, the more their inflation differentials from the rest of the likely for the exchange rate to move out of line world have been at most negligible, and their real unexpectedly. Volatile inflation would result in effective exchange rates have shown comparative volatile real exchange rates, hence volatile stability. nominal exchange rates. In economies with recent In very small open economies such as Hong inflationary experiences, the volatility of nominal Kong and Singapore, domestic prices and interest exchange rates are, by themselves, the source of rates have been largely determined in the inflationary expectations.

Exchange Rate Fluctuations and Macroeconomic Management 15 000 !

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Pacific Economic PEO/Structure The boom can be attributed to as well as

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Exchange Rate Fluctuations and Macroeconomic Management Pacific Economic PEG/Structure Current/Financial Balance and Reserve Change: Chile Current/Financial Balance and Reserve Change: Malaysia

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Pacific Economic PEG/Structure 2.50

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Rate Fluctuations and Macroeconomic 11I1>lll;cJ",OfTIF'1II and

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Pacific Economic PEO/Structure Billion $, 100 cases ¥ $ 80 r------�400 360.00

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Exchange Rate Fluctuations and Macroeconomic Management Chinese Taipei

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-1.5 -0.5 1.5 2 %

Pacific Economic PEO/Structure CONCLUSIVE REMARKS Exchange rate changes, particularly real ones, have proved to play a small and lagged role in We have discussed the interaction between adjusting macroeconomic imbalances at least in exchange rate arrangements and macroeconomic the short run. Generally, setting long-run management in the Pacific region. In developing exchange rate targets is not easy, because we do member economies, more or less managed not know what their equilibrium levels are and exchange rate arrangements have been adopted, how they will proceed not only in the short run, with some reasons. Exchange rate changes by but in the long run. Additional disturbances come themselves can be the source of macroeconomic from major currencies' realignments. In fact, instability. It holds more true for economies with changes in the yen-dollar exchange rate could unstable macroeconomic environments either at have not only significant, but asymmetric effects present or in the recent past, and/or for those on the other member economies, especially those under the transition process of overall structural in East Asia. Yet, there seems to be no choice but reforms. In fact, attempts to use exchange rates as to rely on their macroeconomic policy a nominal anchor, more often than not, turned out coordination, which has appeared to be not very to fail in attaining the ultimate goal of price successful so far. stability. Figure 15 illustrates the positive Japan and the United States have shown correlation between volatilities of nominal and contrasting attitudes toward exchange rate swings real exchange rates in the region over the period in the medium run. The United States benign­ of 1986-95, which suggests that managing neglects and Japan over-reacts. The former has nominal rates at sustainable levels would be been reluctant to adjust its external imbalance, necessary to minimize the volatility of both and the latter paying too much attention to nominal and real exchange rates. exchange rate stability at the cost of the internal Recent huge capital inflows to emerging balance. One reason is the difference in policy markets (most of them in the Pacific) exposed a priorities, i.e. domestic or international. Japan double-edged nature. Specifically it revealed its appeared to misinterpret itself as a small open destabilizing character in the context of emerging economy (indeed, the opposite). The other is the financial markets. Most of those markets can be fact that the U.S. dollar is an international vehicle characterized as comparatively narrow and currency, but the yen is not. Here, however, arises shallow, and right now in the process of the sustainability issue. Namely, once the U.S. deregulation. Without adequate supervision by economy is found unaffordable to the present­ monetary authorities, huge inflows of foreign level over-spending, the fact that the status of the capital have affected the vulnerability of domestic vehicle currency has been eroded (See Figure 17) capital markets, particularly that of the banking would reveal. system. The robustness of the banking system and Under the present non-system, the free float macroeconomic stability would go hand in hand can help more or less insulate each individual together. If the former exists, monetary tightening economy from external developments, at least in could attain its aim to fend off the side effects of the short run. Short-run insulation, however, does foreign capital inflows, while, if the latter holds, not guarantee long-run sustainability. Particularly, banks would finr! little difficulty in their risk observing that real exchange rate changes have management. Figure 16 shows the degree of played a lesser role in adjusting external financial deepening or the measure of financial imbalances, we presume that, given the recent intermediation in the region. It suggests that East trend of increasing interdependence, sustainable Asia tends to be more robust against external growth may not be realized without deliberate disturbances than Latin America. It is only in the efforts for macroeconomic policy coordination in comparative sense, though, as it proved not the Pacific region, which must be symmetric this necessarily true. Refer to the financial turmoil in time. Thailand and Korea in 1997.

Exchange Rate Fluctuations and Macroeconomic Management 25 1111980 1 [] 1995 :

.' . .'. .'. : :

.'. ·i : '.' · : : : 60 : jll :: :;. : '.' :

.'.

:

20 .'.

' . .'. o

Pacific Economic Outlook, PEO/Structure Figure 17 U.S. DOLLAR SHARE OF FOREIGN EXCHANGE RESERVES, INTERNATIONAL ASSETS AND G·10 GOP

US dollar share of foreign exchange reserves, international assets and G-10 GDP

In percentages

_ Foreign exchange reserves ___• __ •• International assets* � GDP

70

60

50

-..... --_...... _­ 40 ....

,.., ... -......

30

Note: Total reserves. assets and G-10 GDP were $1.36. 5.0 and 20.3 trillion respectively in 1995.

* Includes international bonds, cross-border bank liabilities to non-banks, eurocurrency liabilities to domestic non-banks (from 1984) and euronotes (from 1989).

Sources: National data and SIS.

REFERENCES

Asian Development Bank. Key Indicators of ibid. International Financial Statistics. Various Developing Asian and Pacific Countries. 1996. issues.

Bank for International Settlements. Annual Report Ito, Isard, and Symansky. "Economic Growth and 1995/96. 1996. Real Exchange Rate: An Overview of the Balassa-Samuelson Hypothesis," NBER International Monetary Fund. World Economic Working Paper, No.5979. March 1997. Outlook. October 1995. Japan Committee for Pacific Economic Outlook. ibid. "Exchange Rate Movements and Their Capital Flows in the Pacific Region: Past Impacts on Trade and Investment in the APEC Trends and Future Prospects. September 1995. Region," IMF Discussion Paper. October 1995.

Exchange Rate Fluctuations and Macroeconomic Management 'E AUS TRALIA

\'.... 31)

Australia presently has an independently rose to an even greater extent, resulting in a floating exchange rate, though its exchange substantially improved national wealth position. rate system has changed several times this Under a floating exchange rate, current century. Before the floating of the Australian account imbalances, of themselves, arguably dollar and the abolition of exchange controls in become less relevant as an external policy December 1983, the exchange rate was constraint, particularly if understood as the perceived alternatively as an external constraint result of international trade in saving, which can or economy-wide policy instrument to be improve economic welfare for both borrowing varied by the authorities for balance of and lending economies under certain payments or inflation control reasons. The conditions. Greater international capital float of the dollar and accompanying mobility also contributed to Australia's widened liberalisation of international financial current account balance, which has increased transactions transformed the Australian from an average level of around 2.25 percent financial system from being heavily regulated of GDP during the 1960's and 1970's to and segmented into one that was lightly average around 4.5 percent since the early regulated and internationally integrated. Both 1980's. domestic and international financial The Australian authorities are still mindful transactions were quite tightly controlled in of the size of Australia's current account deficit Australia up until the early 1980's. The and foreign debt level, which remain relatively deregulation and inter-nationalisation of large by the standards of other industrialised Australia's financial markets proceeded because economies. One reason for concern is that an there was widespread acceptance that efficiency excessively high level of foreign debt may gains could be realised by removing controls precipitate a sudden outflow of foreign capital. that distorted interest rate settings and domestic Such an event could cause an unexpectedly and international borrowing and lending high currency depreciation further adversely decisions. affecting the confidence of foreign investors, From the early 1980's onwards, the wide­ with undesirable consequences for domestic ranging financial deregulation greatly interest rates and domestic economy activity. improved access to international funds, at the Australia's nominal effective exchange rate is same time allowing residents to invest abroad. the Trade Weighted Index (TWI) which Foreign capital inflows to Australia over this includes the currencies of twenty four time well exceeded capital outflows from countries, accounting for over ninety percent of Australia, giving rise to an increase in the stock Australia's trade in goods and services, most of of Australia's net external liabilities, including a which is now in the Asia-Pacific region. The significant foreign debt, as opposed to foreign real, or inflation-adjusted, effective exchange equity component. Nonetheless, though total rate reflects two possible sources of changes in external liabilities increased sharply following overall competitiveness. In practice, in financial deregulation, domestic asset values Australia as elsewhere, nominal exchange rates

28 Pacific Economic Outlook, PEO/Structure are far more variable than HWC>V,'''U

domestic currency value of

at an average of ca-".�v�'" decade. The reacted at times whenever the currency has pressure, either

that over rate tends to return With a much the

i-vt'.h"r"'" Rate Fluctuations and Macroeconomic Management I CANADA < l ') �'J )

Over the past several years, many countries Hence, the Bank of Canada has accumulated along the Pacific Rim have experienced considerable experience in conducting significant capital inflows. Such capital monetary policy in an open , liberal movements are a response to a number of environment. factors including the sustained implementation As the exchange rate is part of the monetary of sound macro-economic policies and policy transmission mechanism in an open structural reforms, lower interest rates in economy, large capital movements can lead to industrial countries and portfolio currency movements and complicate the diversification. While such a development has conduct of monetary policy. Indeed, for some been welcome, particularly for countries that countries that are in the process of removing, or had been capital constrained, large capital have just removed, foreign exchange and other inflows have, at times, complicated the conduct controls, the ebb and flow of market forces can of monetary policy. Recent exchange rate be disconcerting, and feel like a loss of control. crises in Europe and in Mexico have also However, for Canada, the record shows that an sharpened the concerns of policymakers independent monetary policy is possible even if regarding the rapid growth of cross-border markets are highly integrated and capital flows capital flows. Questions have been raised about are large and mobile. What is required, the very ability of central banks to pursue however, is a flexible exchange rate. This independent monetary policies in a global, monet?L"Y independence is not, however, integrated financial environment. absolute. A central bank's actions will be The Canadian experience in conducting circumscribed by market forces. However, it monetary policy may be of particular interest can acquire manoeuvring room if credible for countries along the Pacific Rim, especially macroeconomic policies are consistently those that are in the process of liberalizing their pursued. It is particularly important that financial markets. Like many countries in this investors, both foreign and domestic, be assured region, Canada is an open economy, a major that the authorities are committed to exporter of primary products, and has maintaining the internal purchasing power of traditionally been an importer of foreign the currency. In this regard, Canadian capital. Moreover, as Canada eliminated authorities have found that transparent central foreign exchange and interest rate controls bank policy objectives and actions have been several decades ago, its capital markets have helpful in anchoring market expectations and become tightly integrated with foreign markets. minimizing destabilizing capital movements.

30 Pacific Economic Outlook, PEa/Structure CH ILE

,

During the last decade, the major issues faced width of the band has been expanded on by the Chilean economy have changed several occasions, to around 10 percent at the dramatically. A decade ago, just after the beginning of 1992. Starting with July of the external debt crisis, the major challenge was to same year, the value of the currency is overcome the huge recession of the early determined on the basis of a reference basket eighties. Today, the Chilean economy is of currencies composed of the U.S. dollar, the ending its twelfth year of continuous and high German mark, and the yen. growth, unemployment is at low levels and the For the last twelve years, the varying external constraint problem has disappeared. emphasis given to the exchange rate policy Among the main keys to Chilean success we framework is due to the different circumstances can mention, first, the stability in the general in the Chilean economy. During the second economic framework, and second, the half of the eighties the goal was a high real implementation of a series of macroeconomic exchange rate in order to confront the scarcity and microeconomic policies that, on the whole, of foreign currency, while in the nineties, the could be called properly oriented, at least in the objective was to avoid the inevitable light of the results achieved. One of these has appreciation resulting from Chile's renewed been the exchange rate policy. access to international capital markets. In this For more than a decade the Central Bank of new situation, the objective of the foreign Chile has implemented its exchange rate policy exchange policy became the accommodation within the framework of an exchange rate band of reasonable external savings, necessary to with hard edges and fu lly indexed to inflation finance part of its domestic investment, but not differentials. It must be pointed out that this as high as to represent an accumulation of exchange rate framework - a central parity foreign debt that makes the economy rate adjusted daily in accordance with the vulnerable to any external shock. The manner previous month's inflation minus the relevant to make this objective operational was to foreign inflation rate, within a band of establish that, at the medium and long term, the fluctuation - is the framework that has been Chilean economy must have deficits in its maintained up to the present time, broadly current account of between 3 percent and 4 speaking. Starting with 1984, Chile has applied percent of GDP. Certainly, in a specific year an exchange rate policy based on a central this deficit may be higher or lower than parity rate aimed at keeping the real exchange indicated, but the important thing is to focus on rate constant. In contrast with other the medium and long term to said ratio. In this experiences, the emphasis has been on the real context, the equilibrium real exchange rate is rather than the nominal exchange rate. There the one that tends to produce, as a moderate have naturally been realignments of the central deficit in the current account. parity rate in the course of this period, carried This objective of having a sustainable out by means of specific devaluations or intertemporal current account deficit, not only revaluations of the central parity rate. The reflects the caution of Chilean economic policy

Exchange Rate Fluctuations and Macroeconomic; Management 31 to current account is an

HUJlURIVH must not be left to those of the economy the of currency the

Pacific Economic Outlook, PEO/Structure CHINA

Before 1979, China instituted a highly­ proves that China has stepped up toward an centralized foreign exchange regime mainly open market economy, participated in the characterized by: the state monopolized division of international labour to a greater foreign trade; trade receipts and payments were extent, involved itself in the international subject to overall state planning; and foreign market. As a result, foreign trade develops in a exchange trading was exclusively handled by steady and healthy manner; the amount of Bank of China. During the 1979-1993 period, foreign capital utilized has increased by a big China launched a series of major reforms in its margm. There has also been a sustained foreign exchange regime. increase in China's foreign exchange reserve, Various financial institutions co-exist and which increased to 99.8 billion dollars by the compete with Bank of China; a foreign end of July, 1996. exchange retention system was introduced to let The Chinese government has committed to export enterprises retain a given quota of fully meet requirements in article 8 of the IMF foreign exchange as permitted by the state after Agreement by the year 2000, that is Renminbi settling accounts with the bank; liberty was to be fully convertible under current accounts. given to Chinese citizens who could possess In 1996, reforms are further deepening in foreign exchange and open foreign currency China's foreign exchange regime. The People's accounts with bank for free deposits and Bank of China decided: Beginning in 1996 the drawings. banking system for the settlement and sales of As of January 1, 1994, Renminbi dual foreign exchange apply to foreign-funded exchange rates were merged so that a unitary, enterprises, eliminating restrictions on their use controlled floating exchange rate based on of foreign exchange for current accounts; they market supply and demand was set up in China; are permitted to retain foreign exchange the banking system for the settlement and sales earnings and open at any designated bank a of foreign exchange was introduced to replace settlement account for current account the previous one; Renminbi was made transactions and a special account for capital conditionally convertible under current account transactions. The foreign exchange accounts; a unified foreign exchange market administration department will determine the was set up with banks as the main trading body, ceiling amount on their settlement account while the central Bank - People's Bank of according to their capital size and their needs China - exerts timely interference in the for normal business operations. There are market and regulates supply and demand in three choices for foreign-funded enterprises to light of the needs of macroeconomic control so use foreign exchange only against valid as to maintain the Renminbi's stability. commercial documents and certificates. First, The new foreign exchange regime and they can make payment from their account; exchange rate mechanism have turned the second, they can purchase the needed foreign Renminbi exchange rate from previously exchange from the designated bank, and the controlled to managed floating one, which third, they can purchase at the foreign

Exchange Rate Fluctuations and Macroeconomic Management 33 swap center. stable level is are some other one of the for China's macroeconomic set The central bank

among is the most unified was established

reform

Pacific Economic PEO/Structure COLOMBIA

/ ,,----- _/\ \ c 0�

During the period 1967-1991, Colombia environment, was progressively modified until operated a crawling-peg system assisted with transformed into a system that permitted more strict capital controls in which foreign flexibility in foreign exchange transactions and exchange transactions were severely delimited allowed the market play a greater role. Since and centralized and supervised by the Central 1991, Colombia has used two variants of a Bank. Through the 1980's, it turned out to be crawling target-zone for the exchange rate, clear for the authorities that those similar to those existing in Chile and Israel. arrangements, originally designed to handle the During the 1967-91 period, the crawling­ recurrent episodes of the 1950's and 60's of peg regime in operation had important costs foreign exchange rationing and balance of for society. The main cost was the acceleration payments crises, were becoming increasingly of inflation and the introduction of an inertial deficient and troublesome. component that has made the reduction of Since mid-1991, Colombia has undertaken inflation today a very difficult task. Inflation structural economic reforms known as the during this period, however, was more stable "Apertura." These reforms are directed at than before. Also, the capital flow controls that transforming a semi-open, slow growing and had to be in place for the crawling peg regime heavily intervened and distorted economy into to work properly, may have introduced costly an open, flexible and dynamic one. Labor distortions to the economy (basically higher markets were made more flexible to reduce the real interest rates, and a protected, repressed rigidity, instability, uncertainty and informality and inefficient financial system). that characterized, until then, labor relations. The "implicit" and "explicit" target zone The central bank was granted independence to systems adopted after 1991 were in response to focus on its objective of price stability and the a greater emphasis placed on reducing financial system reform, which favored inflation. This required monetary universal institutions to increase competition independence, which in turn can only be and reduce inefficiency, eliminated restrictions attained if the exchange rate has some degree on foreign investment in this sector and of flexibility. encouraged the privatization of numerous state­ After 1991, government expenditure owned banks. continued to play an important role in With regard to exchange arrangements, explaining RER movements. The same can be quantitative restrictions on the international said of the credit booms generated by the large trade of goods and services were lifted, and the capital inflows, that fund substantial increases in tariff structure was simplified and tariffs were the demand for non-tradable goods. reduced. The central bank was released of The target zone systems have limited the scrutinizing and conducting foreign exchange scope for RER targeting, sometimes demanded transactions directly with the non-financial by the exporters. In the Colombian case, this private sector. The crawling peg system, not has been made possible by the allocation of compatible with the new economic both monetary and foreign exchange policy to

Exchange Rate Fluctuations and Macroeconomic Management 35 Pacific Economic PEO/Structure HONG KONG

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The Hong Kong dollar has been linked to the means that the exchange rate or the interest rate US dollar since October 1983, with the link rate cannot be taken as a discretionary policy set at HK$7.80 to US$1. Since the adoption of variable that can be varied by the Government this linked exchange rate system, Hong Kong's to influence trade, investment, the level of monetary policy objective has been clearly inflation and the overall performance of the prescribed as maintaining exchange rate economy. However, as the exchange rates of stability. Over the years, the Hong Kong the US dollar against other major currencies do Monetary Authority has incorporated a series fluctuate from time to time, exchange rate of monetary measures designed to strengthen movements apart from those of a short-term its capability to conduct money market nature in the global financial market will have operations. These include: (1) removal of the effects on the Hong Kong economy. interest rate ceiling and floor to allow full More specifically, exchange rate movements flexibility of interest rates in both directions do exert quite a strong influence on Hong (1987-88); (2) introduction of the Accounting Kong's export performance. The elasticity of Arrangements to acquire direct control over import demand against exchange rate interbank liquidity (1988); (3) launching of the movements is however rather low, primarily Exchange Fund Bills and Notes Programme to because Hong Kong relies heavily on imports render the medium for conducting open for both production and consumption with market operations (1990); (4) introduction of often very little possible recourse to local the Liquidity Adjustment Facility which is the production. There is also quite an apparent Hong Kong version of the discount window link between exchange rate movements and (1992); and (5) conclusion of bilateral investment in machinery and equipment in the repurchase agreements with a number of local manufacturing sector. Even on a wider central banks in the region, thereby enhancing investment front, evidence suggests that the further the liquidity of the US dollar assets held years in which exports grew strongly also by the Exchange Fund (1995-97). registered good growth in investment in These monetary measures have greatly machinery and equipment. enhanced the robustness of the system of Through the years, fluctuations in the monetary management in Hong Kong. exchange rate of the Japanese Yen against the Credibility of the link is further underpinned US dollar have proved to be an influential by substantial foreign exchange reserves, sound factor affecting Hong Kong's import prices. economic fundamentals, and a track record of Some correlation also exists between import sound fiscal discipline. Since the early part of prices and consumer prices. But with consumer 1991, the market exchange rate of the Hong prices consistently rising faster than import Kong dollar against the US dollar has prices, it is evident that the bulk of inflationary consistently stayed on the strong side of the pressures in the early 1990s were generated link rate. locally rather than imported. As such, the local Adoption of the linked exchange rate system resource balance, much more than the

Exchange Rate Fluctuations and Macroeconomic Management '!l Pacific Economic PEO/Structure -\ -

...... _ I

A

\ \ INDONESIA /

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Along with securing a low and stable inflation 1986, due to the droppings oil prices. Since rate, Indonesian macroeconomic policies have then, the policy has been changed from a been geared toward promoting a sustainable discrete devaluation to a manage floating level of current accounts, and to maintain a system with a continuous steady depreciation of comfortable level of foreign exchange reserves. the rupiah against a basket of currencies of These are not easy tasks, considering that maj or trading partners. This has marked the Indonesia has a free foreign exchange system beginning of exchange rates policy which was and an open economy. These three aspects are mainly targeted at maintaining real competitive the main factors for selecting an appropriate effective exchange rates, by allowing the exchange rate policy, which becomes even currency to depreciate to reflect the real interest more difficult as there are complex rates differential. interrelationships between exchange rate The main factor in setting the official rate management and domestic economic policy. has been the inflation differential between In the area of foreign exchange Indonesia and its maj or trading partners. The management, as part of the trade and exchange policy is intended to create stability and liberalization policies, the rupiah was devalued certainty, especially for exporters, and to in April 1970 to coincide with the free market maintain competitiveness of the economy in the rate, followed with exchange rate unification in face of Indonesia's relatively high inflation. December 1970. Meanwhile, in order to Up to early 1994, Bank Indonesia was improve the balance of payment account and to following a policy of depreciating the nominal reestablish its international credit standing. rupiah/dollar middle exchange rate at a rate of Indonesia liberalized all capital account approximately 4 percent per year. Together transactions in 1972, reversing the conventional with other structural adjustments, this has wisdom of accounts reforms sequence, as resulted in dramatic growth of manufacturing argued by most economists. The absence of exports that have contributed more than 50 foreign exchange controls also meant that percent of the total export revenue by 1993. Indonesia could be very vulnerable to any However, the increasing volatility of the issues of capital flight, and therefore enforce monetary aggregates due to the openness of the discipline in managing the external accounts, as financial sector, with the increasing activity of well as the government budget. the capital and money markets that can Since then, it has been changing gradually immediately invite a huge capital inflow if the from a 'fixed exchange rate regime' during interest differential is attractive, has made 1970-1973, to a 'quasi fixed regime' for the monetary policy less effective in controlling period 1973-1982. The oil shock in late 1982 inflation. In order to reduce the sharp has forced the government to devalue the fluctuation of speculative money, starting in currency in March 1983, in order to maintain 1994, Bank Indonesia has been slowly competitiveness and to increase non-oil widening the intervention band around the exports. The rupiah was devalued further in middle rate. In the beginning, the Bank

Exchange Rate Fluctuations and Macroeconomic Management 39 1

Pacific Economic PEO/Struc!ure JAPAN

7

Since 1973, we have witnessed how exchange policy and expansionary monetary policy with rates easily move out of line with economic some reasons. Japan lost discretion in its fiscal fundamentals. In fact, one of the main policy because of the fiscal consolidation to objectives of international policy coordination regain medium-term fiscal balance on the one is to decrease the frequency and size of hand, and resorted only to monetary policy in exchange rate misalignments among major offsetting the recessionary effects of yen currencies including the Japanese yen. It is appreciation on the other hand. This policy generally not easy, however, to identify mix, however, ended up with unprecedented misalignments. Before doing so, we must have asset price inflation, which eventually led to some idea about equilibrium levels of exchange serious asset price deflation from the 1990s to rates, the present. As far as medium-term and long-term For the microeconomic aspect, long-term equilibrium real exchange rates are concerned, real exchange rate changes have had significant however, we may be able to rely on those impacts on both trade and investment flows in exchange rate determination models which take the case of Japan. Yen appreciation after the account of goods, as well as assets arbitrage Plaza Accord was obviously a big push to relationships. PPP signifies the former and the Japanese FDI in the Pacific region. With some asset market approach the latter. According to time lags, increasingly globalized production these models, while these fundamental and other business networks of Japanese relationships suggest medium-term real corporations have brought about significant appreciation of the yen against the U.S. dollar, changes in the structure of Japanese exports, as we have had persistent real exchange rate well as imports ..The shift of comparative misalignments since 1980, namely, advantages has been accelerated toward more undervaluation during the first half of the technology-intensive products on the export 1980s, and overvaluation during the second side, and manufactured products have become half of the 1980s. maj or items on the import side. As a These exchange rate changes have both consequence, exports has become less price macroeconomic and microeconomic elastic and less income elastic, and imports implications. For the macroeconomic aspect, more income elastic. the Japanese experience in the latter half of the These impacts on trade and investment, 1980s shows some lessons to be learned on the naturally, have not been confined to Japan, but interaction between exchange rate changes and to its partner economies in the region. macroeconomic management. The Plaza Particularly because these economies have Accord in 1985 realized a sharp nominal as often had asymmetric bilateral trade well as real appreciation of the yen in line with relationships with the U.S. and Japan (i.e. net the international policy coordination. The exporters to the U.S. and net importers from bubble economy during the period resulted Japan), changes in yen-dollar real exchange from a problematic policy mix of tight fiscal rates have generated both strong short-term

Exchange Rate Fluctuations and Macroeconomic Management 41 and

economies and dollar would

Pacific Economic PEO/Structure KOREA \\ \

Korea began to terminate some regulatory performances in the 1990s. The last empirical policies in the 1980s, and sped up the finding is that the REER tends to revert to the liberalization process in the 1990s. One of the mean level in the 1990s, a tendency which does most important reforms during this period was not appear as strong in the 1980s. Based on all the introduction of the "Market Average of these findings, a tentative .conclusion is that Exchange Rate System" in 1990 that replaced the new exchange rate system properly reflects the discretionary "Multiple Currency Basket market forces. System" of the 1980s. Compared to the Yet, recent capital flows into Korea appear to previous system of managed float, the new one have over-evaluated Korea's exchange rate is a great advancement toward a free market, in compared to the level that would lead the that the exchange rates are basically determined current account balance. With capital markets through demands for and supplies of foreign being liberalized, the appreciation of the currencies in exchange markets. Another exchange rate and the current account deficit important reform in the 1990s regarding are natural results of high interest rates in the external transactions is the liberalization of Korean economy. Also, the current size of external capital markets. The anticipated current account deficits (around 3 percent of capital inflow is expected to appreciate the GDP) seems to be sustainable, considering the Korean won, which will affect the price potential growth rate and the long-run trend of competitiveness of Korean products, and interest rates in Korea. As the Korean eventually the whole economy. economy accumulates physical capital in the Data analyses clearly establish the impact of long-run, both marginal returns to capital and the exchange rate, particularly the REER (Real (real) interest rates will gradually decline, which Effective Exchange Rate), on current account will lessen appreciation pressures on the fluctuations with time lags. The most exchange rate and decrease the current account prominent example was the huge current deficit. account surplus of up to 8 percent of GDP Employing a macro-model with this during the 1987-1988 period, which was led by rationale, simulation analyses were performed the depreciation of the REER up to 25 percent to see how the Korean economy would evolve one year earlier. In terms of the explanatory over time under different macro-policy power for the fluctuations in the current schemes, including the speed of capital market account, the CPI-based REER, with variable liberalization. One of the simulation results weights on trading partners, appears to be better shows that the current account deficit will be than PPI-based ones with fixed weights. around 2 to 4 percent of GDP, depending upon Another important finding is that the REER the speed of the capital market liberalization has been more stable in the 1990s than in the process. In the extreme case where capital 1980s, which has certainly helped maintain the markets are opened in a big-bang style, stability of the current account movements well however, the REER would appreciate more than as and the general macro-economic 12 percent and the current account deficit

Exchange Rate Fluctuations and Macroeconomic Management 43 would reach 5 '"'''".,,'''', . of GDP first domestic

Pacific Economic PEO/Structure ' ; , ( \ MALAYSIA \ " / \\

" .. ..

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The Malaysian currency called the "Ringgit" Plaza Accord. The competitive exchange rate was first issued on June 12, 1967, ten years of the Ringgit has clearly played an important after Malaysia gained independence, and eight contributory role in Malaysia's strong years after the establishment of the Central economic performance. Bank Negara has Bank, Bank Negara Malaysia. For reasons of officially reiterated that exchange rate policy history and by virtue of its declared par value was never used to boost Malaysian export of 0.290299 grammes of fine gold, the Ringgit competitiveness, nor to help resolve the had the same par value and was completely nagging problem of a substantial deficit in the interchangeable with the Singapore dollar, the current account in the balance of payments. In Brunei dollar and the Malayan dollar. In the short-term, a major determinant for the addition to a fixed exchange value of 2s.4d, the Ringgit exchange rate seems to be the interest­ Ringgit had a parity of RM3.06 to the US rate differentials between the 3-month KLIBOR dollar. Following the collapse of the Bretton in Ringgit deposits and the 3-month US dollar Woods system of fixed exchange rates in deposit rate overseas. Thus, any sudden shift in August 1971, the Ringgit was floated on June US monetary policy regarding short-term 21, 1973, initially as a managed float pegged to interest rates could influence the short-term the US dollar which was the intervention outlook for the Ringgit. Over the longer-term, currency. the general trend line of the Ringgit seems to On September 27, 1975, the Ringgit was follow the US dollar/Yen rate. pegged for greater stability to a currency With the termination of the exchange rate as composite comprising the currencies of the monetary anchor in 1975, the main focus Malaysia's major trading partners, and this new of monetary policy is to achieve domestic price determination of the Ringgit exchange value stability by curbing excess demand and by provides the basis for Central Bank intervention influencing the growth of monetary aggregates, to maintain "orderly market trading conditions" in particular M3, The role of monetary policy for the Ringgit. Between 1980 and 1995, the is to work in concert with fiscal policy to exchange value of the Ringgit has shown a achieve the macroeconomic targets of strong cumulative decline of 30 percent as measured growth in the 7-8 percent range, domestic by the Bank Negara Malaysia currency inflation of preferably less than 4 percent with composite index; a cumulative decline of 77 zero inflation as the ultimate target, and percent against the Singapore dollar, a decline external balance in the balance of payments of 170 percent against the Yen and a decline of current account. The search for as well as 50 percent against the US dollar/Yen rate. finding common agreement on an equilibrium Consequently, Malaysia's international exchange rate for the Ringgit remains competitiveness, as measured by the statistically difficult because of the difficulty in manufacturing unit labour cost in terms of the achieving both internal and external balance in real effective exchange rate, was considerably a world of change. While exchange rate enhanced, particularly after 1985 following the management may be described as "leaning

Exchange Rate Fluctuations and Macroeconomic Management 45 Pacific Economic Outlook, PEO/Structure MEX ICO

After more than twenty years with a fixed controlled and another freely determined. The exchange rate, on September 1, 1976, the rationale was that the controlled exchange rate Mexican peso was devalued. In the period would be used for required imports of from 1976 to 1996, Mexico has gone from a intermediate and capital goods and, thus, it fixed exchange rate regime to a freely floating would reduce the inflationary impact of exchange rate. In the interim, Mexico adopted exchange rate depreciation on costs. The free a comprehensive exchange control, a crawling exchange rate would be applied to the rest of peg, and an exchange rate band. In addition, the exchange transactions, and would be the exchange rate was also used as a nominal determined by the supply and demand of U.S. anchor in the system. currency. Following the 1976 devaluation, a "semi­ Under the dual system, between 1985 and fixed" exchange rate system was initially put in 1987, the exchange policy in Mexico sought in place. The abundance of resources from general a substantial depreciation of the abroad and the oil revenues allowed Mexico to exchange rate, in order to face the adverse manage such a regime virtually as a fixed evolution of the terms of trade and to boost the exchange regime. However, the rise in competitiveness of domestic producers. While international interest rates, the collapse of oil this policy helped to cope with balance of prices, and the recession in the United States in payments problems, it gave rise to strong conjunction with domestic fiscal imbalances inflationary pressures. Thus, by 1987 the acute and capital outflows, brought the cyclical external sector crisis had been replaced by expansion based on oil exports and foreign spiraling inflation, which reached an annual borrowing to a sharp halt in 1982. The rate of 180 percent in January 1988. With this combination of these elements produced a rate being the highest in modem Mexican reduction in the supply of foreign currency economic history, it became clear that the and an increase in its demand, and induced control of inflation had to become the first speculation. Thus, in order to face speculative priority. pressures in the exchange market, the Bank of In order to reduce inflation at the lowest Mexico announced in February 1982 its possible cost to economic growth, in December temporary exit from the foreign exchange 1987, the authorities implemented a market, which led to a depreciation of around stabilization program known as the Economic 39 percent. Solidarity Pact (PSE). Fixing the exchange rate In February 1982, a policy of daily to serve as a nominal anchor for prices was a depreciation of the peso was put in place. key element of the PSE. Indeed, the Nevertheless, this policy was not effective in stabilization program helped to bring down curtailing capital outflows and, by the inflation from 159 percent in 1987, to 52 beginning of August, a new system was percent in 1988, to 12 percent in 1992 and to 7 adopted. It introduced two different exchange percent in 1994. rates between the peso and the US dollar, one As the free and the controlled exchange

Exchange Rate Fluctuations and Macroeconomic Management 47 of the

band.

Pacific Economic Outlook, PEO/Structure NEW ZEALAND

/

New Zealand is a small open economy which and the liberalisation of its financial markets experienced dramatic policy reform during the has resulted in the exchange rate playing a key 1980s. Until 1984, the economy was highly role in macroeconomic policy. In particular, regulated and macroeconomic policy was New Zealand's monetary policy regime conducted in an often ad hoc fashion. Prior to (focused solely on price stability) has liberalisation, exchange rate policy varied, but effectively relied on the exchange rate as its the New Zealand dollar was typically fixed primary instrument for controlling inflation. relative to a basket of trading partner This has lead to a number of concerns about currenCies. the extent to which monetary policy has In line with other liberalisation policies, the impacted on the tradable sector, at a time when New Zealand dollar was floated in 1985. Since most inflationary pressure has resided in the that time, the combination of New Zealand's non-tradable sector. small size, its openness to international trade,

Exchange Rate Fluctuations and Macroeconomic Management 49 PE RU

Since August 1990, Peru has applied a Control of monetary aggregates implies a free comprehensive economic program aimed at exchange rate, with interventions by the Central reducing inflation and creating the basis for Bank only in order to smooth out fluctuations, sustainable growth. This program includes an and according to non-inflationary growth of economic policy characterized by control of the money base. Between 1990 and 1995, the monetary aggregates, fiscal austerity, and the domestic currency has shown gradual introduction of structural reforms intended to depreciation without abrupt variations. restore to the market to its role in resource Nominal variations of the monthly exchange allocation. rate have decreased from a range between -1 The implementation of a stabilization policy and 7 percent in 1992, to between 0.4 and 1.7 based on monetary aggregates, instead of the percent in 1996. exchange rate, was adopted in the context of a The real exchange rate - estimated under negative level of international reserves, the purchasing power parity (PPP) approach - substantial distortion in relative prices, and a has reduced about 20 percent, with respect to lack of credibility after several attempts to the level observed in August 1990. However, stabilize the economy between 1988 and 1990. evolution of the real exchange rate cannot be This control of monetary aggregates has seen in isolation from recent changes in the continued after the launching of the Peruvian economy. The reduction of the real stabilization program, due to the advantages it exchange rate index does not necessarily imply offers in the context of free capital mobility. an overvaluation of the domestic currency. The flexible exchange rate regime has an Structural reforms (such as the deregulation of insulating and mitigating effect against external capital flows, the promotion of foreign shocks, and allows a gradual adjustment in the investment, and the reform of trade and exchange rate in case of changes in the external privatization processes) have increased the economic trends in capital markets. overall efficiency of the economy, and have Thus, the nominal exchange rate is attracted long-term capital flows, reducing the determined by market forces. There is no equilibrium exchange rate. exchange rate objective in the monetary policy.

50 Pacific Economic Outlook, PEO/Structure (, , ! " f ) (.�f . PH ILIPPI NES

The Philippine foreign exchange rate purchases. As a result, quasi-fiscal cost (FOREX), in both nominal and real terms, has mounted. The rises in inflation and interest fluctuated widely since 1980. Wide fluctuation rates have been checked. Interest rates have not is seen especially in the mid-1 980s and early been increasing because of the series of 1990s. But the general trend of the nominal reduction in reserve requirem�nt, which is a tax exchange rate is that of depreciation. In fact, on financial intermediation. While both the nominal FOREX depreciated 27 percent per inflation and interest rates have been checked, year in the last 15 years. In real terms, the government has not been able to arrest the however, the movement is different. Although real appreciation of the currency. there had been years when the real FOREX A closer look of the historic movement of depreciated, its general direction is that of an the FOREX would show that: (1) the foreign appreciation. Notable real FOREX exchange rate policy of the Philippines is appreciation took place in 1989, 1992, 1994 reactionary (i.e., FOREX is adjusted only and 1995. As a result of the successive real during periods economic crises); (2) thus, appreciation, its level is below the 1980 level. FOREX depreciation is generally associated The balance of trade (BOT) deficit was the with stagflation; and (3) the exchange rate highest in the last two year when the FOREX policy is crucially linked with foreign debt appreciated the most in real terms. The BOT service (i.e., there is a general reluctance to a deficit to GNP ration increased from -6.1 FOREX depreciation, because of its huge percent in 1989 to -14.1 percent in the first 6 budgetary implications through debt service months of 1996. However, the deficit in the payments). BOT is financed by: (1) remittances of Research has shown that real appreciation of overseas contract workers; (2) peso conversion the FOREX has adverse effects on the of foreign currency units; and (3) direct economy. In particular, the study found that: investment, mostly portfolio investment. The (1) a real peso appreciation of say 10 percent last few years saw surges in the inflow from leads to an 8 percent reduction in the lists of these sources. industries with comparative advantage; and (2) The policy response of the government to a resource flow from the tradable to the non­ the surge in foreign resource inflows consisted tradable sector, as indicated by the declining of the following measures: (1) intervention; (2) share of export-oriented firms in the Board of sterilization; (3) reduction in reserve Investment approved and new projects. requirements; and (4) budget surplus. The Furthermore, those sub-sectors with the lowest government has been actively purchasing value-added coefficient are the ones which foreign exchange in the market that resulted in would benefit most from a real appreciation of the huge accumulation of foreign reserves. To the currency. Within the tradable sector, on the minimize the inflationary effects of this other hand, the exporting sectors with the measure, the government issued government highest value added coefficient would be the debt papers to sterilize the effects of the ones which would be most adversely affected.

Exchange Rate Fluctuations and Macroeconomic Management 51 two n onal, industries with very limited links economy. These sectors are

Pacific Economic PEO/Structure \------t----- \\ \ \\ , RUSS IA \.

, , ,

\ , , /'

Economic reforms in 1992-1996 have resulted commercial banks participated actively in the in fundamental systemic changes in Russia's game of full value on exchange rate economic mechanism. A high level of fluctuation. liberalisation has been achieved in creation of In early 1994, the CBR started introducing outward-looking economy. The results of full scale control over the national currency Russian reforms, however, have contradictory exchange rate fluctuations. The CBR banned appraisals. In 1991-1995 GDP dropped by 35 the internal use of cash forms of hard currency percent. Considering the complications of from January 1994. The rouble's rate of economic reforms, the exchange rate decline accelerated in late 1994, reflecting the management targets in Russia were to worsening fiscal situation and fears of contribute to financial and monetary accelerating inflation. This resulted in a crisis stabilization as a preliminary condition for on October 11, 1994 ("Black Thursday"), when implementing a long-term development the Russian currency lost 21.5 percent of its strategy. Exchange rate management in Russia value against the US dollar in just one day's has passed through different stage in 1989- trade. Since the end of 1994, monetary and 1996. fiscal policy were considerably tightened, Exchange rate management in Russia has leading to greater demand for roubles. passed through different steps in 1989-1 996. In 1995, exchange rate management became In 1989, the Central Bank of the USSR began the real priority in the CBR monetary and to introduce an official foreign currency financial policy to curb the inflation. Since market based on a Rouble floating regime to July 1995, the CBR has maintained the rouble replace the Government centralized distribution within a target band, known as the rouble of hard currency. Hidden inflation in the corridor. After three years of high inflation USSR/Russia, coupled with a multiple rates and rapid rouble depreciation, 1995 Rouble/USD exchange rate have distorted the marked the beginning of a period of mechanism of macroeconomic management, decelerating inflation and a more stable rouble. and misrepresented the real economic processes The Russian economy responded to the in the country. government's disinflationary policy. The Since July 1992, the Central Bank of Russia average monthly rate of inflation was 7.4 (CBR) stopped fixing a multiple exchange rate percent in 1995, as compared to 10 percent in of the rouble and started determining an 1994. official rouble exchange rate based on the Since July 1, 1996, Russia has moved from a results of daily foreign currency trade on the strict target band rouble corridor to a so called Moscow Interbank Currency Exchange "sliding peg system" or "sloping rouble (MICEX). That was the period of rouble corridor," based on Rouble/USD exchange rate exchange rate free floating. The CBR fluctuation forecasts. Only strictly limited intervened from time to time to slow the decline changes were permitted as compared to of the rouble exchange rate. Russian forecasted Rouble/USD exchange rate

Exchange Rate Fluctuations and Macroeconomic Management 53 III

Transition to an open

as well as

Pacific Economic Outlook, PEO/Structure SINGAPORE \

, ,

'\. , ,

Singapore is amongst one of the few economies being the largest component of aggregate in the East-Asia region which has enj oyed demand in Singapore, the exchange rate has robust and sustained economic growth, at the therefore a powerful effect on the GDP. With same time achieving full employment with the high import content constituting to 70 price stability since her 1985-86 recession. percent of exports and 60 percent of total Macroeconomic stabilisation by the Monetary domestic expenditures, domestic prices are Authority of Singapore (MAS) since the early largely determined by world prices for a given 1980's has been dominated by monetary exchange rate. policy, which essentially is the exchange rate Secondly, Singapore is an international policy. Given that the government's consistent financial centre dominated by a large offshore objective of budgetary policy is to contain banking sector, with neither exchange controls operating and development expenditures at a nor restrictions on foreign direct investment level capable of being financed by government flows. Given the free convertibility of deposits revenues, the role for active fiscal stabilisation between local and foreign currencies and swift in Singapore is some what curtailed. capital mobility to exploit covered interest MAS has adopted the exchange rate as the arbitrage, the policy implications are such that moving nominal anchor for monetary policy domestic interest rates are largely determined since the early 1980's, which concentrates on a both by foreign rates and expectations on single anchor instead of simultaneously future strength of the Singapore dollar. monitoring a few intermediate targets or Complete capital mobility in the absence of control measures; neither would Singapore exchange controls and substantial balance of indulge in maintaining an official peg of some payment flows imply that movements in sort as this may lead to unrealistic exchange domestic monetary aggregates are affected by rates. Singapore's real effective exchange rate funds from abroad. (REER) index exhibited declining trends in the Thirdly, Singapore has a prudent mid 1980's, but thereafter picked up from government with fiscal surpluses and strong 1989, and we expect the Singapore dollar to savings. Due to favorable external environment weaken slightly in 1997. In fact, in terms of and strong regional growth, the 1980's and the REER index, the Singapore dollar has 1990's have been decades of good economic appreciated against the US dollar by as much as upturns, with gross national savings as a 27 percent since the 1985-86 recession. percentage of GDP amounting to 45 percent To fully appreciate the exchange rate throughout the 1990's. These rather unusual management of the MAS, one must first be government and institutional features added familiar with Singapore's economic another dimension to the exchange rate policy, circumstances, which in turns have profound not only in terms of incipient appreciation of macro policy implications. Firstly, Singapore is the Singapore dollar and the liquidity drain a small open economy engaged in international from the banking system, but also complicates trade. Given the non-oil domestic exports implementation of the policy objectives.

Exchange Rate Fluctuations and Macroeconomic Management 55 !

Pacific Economic PEO/Structure CH INESE TAIPE I'

Similar to other major economies, Chinese and the exchange rates of Yen/USD and Taipei's foreign exchange rate system has been DMIUSD. It is shown that some of the variables undergoing structural changes for the last four such as CPI and trade surplus are not highly decades. To begin with, a system of fixed correlated with NTD/USD. Judging from the exchange rate had been adopted prior to 1969. high correlation coefficients between The formal foreign exchange market was NTD/USD, YenIUSD, and D"MIUSD, it appears established and the fl oating exchange rate the long-term movements of NTD/USD are system was hence put to use in January 1979. strongly influenced by YenlUSD and DMIUSD. However, center rate and daily movement The real effective exchange rate (REER) of restrictions were implemented in Chinese the NTD is also investigated. It seems that the Taipei's foreign exchange market between movement of the REER index of the NTD is February 1979 and May 1986. The revision of consistent with that of nominal exchange rate. the Statue for the Administration of Foreign According to the nominal exchange rate, the Exchange (SAFE) in May 1986 represented a NTD depreciated in the early 1980s, significant step of financial liberalization of appreciated in the late 1980s, and then Chinese Taipei. The dirty floating system was stabilized in the early 1990s. Based on the abolished in April 1989. Since then, a free REER index, the NTD began its depreciation in floating system has been employed in Chinese 1981, then went on an appreciation process Taipei's foreign exchange market. starting from 1986 and reached its peak in Prior to 1979, the exchange rate of the NTD 1989, and depreciated thereafter, except when it vis-a-vis the USD was practically held constant surged again in 1992. with two exceptions of appreciation which Although the fluctuations of the NTD in the occurred in February 1973 and July 1978. In depreciation and stabilization periods did cause contrast, beginning from the early 1980s, the certain concerns, the NTD appreciation volatility of the exchange rate increased produced the most significant consequences to noticeably. The volatility of the NTD/USD the economy. Three major consequences are exchange rate in four periods are examined. studied: (1) fundamental changes in foreign As Chinese Taipei became more liberalized in direct investment; (2) the emergence and both current and capital accounts, the exchange bursting of the bubble economy; and (3) stable rate was inevitably subject to the volatility of price levels. The fast appreciation of the NTD external factors such as the variation in the produced several fundamental changes in FDI. Balance of Payment, the fluctuations in the For example, it practically drove labor-intensive prices of primary goods in international industries into the world market. During the market, and the movements of maj or late 1980s, outward FDI went to southeastern currencies. We examine the relationship Asia countries. In the early 1990s, China among NTD/USD and factors such as money became favorite destination of outward supply variables, inflation rate, nominal interest investment. This phenomenon is usually rate, trade surplus, real interest rate differentials, referred as the industry hollowing-out effe ct.

Exchange Rate Fluctuations and Macroeconomic Management Sf In to increased outward the money game FDI from countries nurtured In the late 1980s the way. work ethic of remarkable FDI

into '-'HUH,'''_ its ways to the real estate market and caused the NTD stabilized the and real

H1« U"'-'" became stale. Even after seven the stock and have results. never

Pacific Economic Outlook, PEO/Structure " r' \ l 1 \ � UNI TED STATES \ � \ I

f J

The 1980-95 period witnessed two episodes in in foreign exchange markets have concluded which the value of the dollar moved first that they have been rather ineffective. On the sharply in one direction, and soon thereafter in other hand, when there was genuine a reversed direction. From 1980-1985, the cooperation in the monetary and fiscal policies value of the dollar rose by over 40 percent and of G-7 and especially G-3 countries, the current then between 1985 and 1987 fell back to where account balance moved toward equilibrium and it started. Then again, after a period of stability the value of the dollar stabilized. between 1988 and 1993, and between 1993 and The expanding current account deficit and mid-1995, the dollar fell by another 20 percent the fall in the value of the dollar from 1993 to before recovering since then. The two mid-1995 gave rise to fears that the US dollar subperiods of considerable instability in the was considerably undervalued and yet to rising value of the dollar gave rise to fears of serious concerns with the sustainability of the current misalignments in nominal as well as real account deficits. The fall in the value of the exchange rates, and in tum, to various efforts dollar was accentuated by US support for the by monetary and fiscal authorities to intervene. Mexican peso in the aftermath of the The sharp appreciation of the dollar in the devaluation of the peso which was forced upon early 1980s was associated with an unusual Mexican authorities in December, 1994. Once combination of extremely loose fiscal policy again, fears of further decline in the dollar and and extremely tight monetary policy (the latter the non-sustainability of the large US current aimed at reducing the rate of inflation). The account deficits gave rise to international result was a sharp increase in interest rates efforts to deal with both problems. Although which triggered a massive inflow of foreign the dollar has regained most of the value it lost capital, and converted the current account in the 1993 to mid-1995 period, the current balance from one of surplus to one of deficit. account deficit continues to soar. The current account has remained negative ever Through these various exchange rate crises, since and, with the exception of the sharp there have been recurring signs of equilibration recession year 1991, these deficits have failures. For example, exchange rates appear to generally been large (often in excess of $100 have sometimes been locked in one direction or billion). another by "rational bubble" behavior on the When the value of the dollar was at its peak part of speculative traders in foreign exchange in the mid-1980s, there was considerable markets. Also, many relevant flows of the US, recognition that it was severely overvalued, and in both the current and capital accounts, have yet a "bubble" mentality seemed to prevent its been found to react only very slowly or even fall. To help overcome this stickiness and also perversely to changes in relative prices such as the huge US current account deficit, eventually, interest rates and exchange rates. In addition, G-7 countries agreed to policy coordination nominal and relative goods prices respond and to intervention. Most (but not all) slowly and incompletely to nominal exchange evaluations of the attempts at direct intervention rate changes. US monetary and fiscal

Exchange Rate Fluctuations and Macroeconomic Management 59 Pacific Economic PEO/Structure I / \ / VI ETNAM 'I'

I({ \l\\\

J. t

It can be said that in Vietnam, the exchange accordingly. The Bank permits a 0.5 percent rate policy has been established since 1989- fluctuation on either side of the official rate 1990. When the former Soviet Union and West (which it fixes on a daily basis), and has set up European markets were disintegrated, Vietnam a Foreign Exchange Stability Fund in USD to had to shift its trade to the sector using USD in be used if required to support the dong. This is payment. At the beginning period (1989- the first time the SBV introduced an exchange 1991), the exchange rate between the rate close to the free market. The difference Vietnamese dong and the US dollar sharply between the official exchange rate and the fluctuated in a continuous upward trend, market exchange rate has been reduced. This because it was "let floated." The fixed and led to exchange rate changes in line with multi- exchange rate system was replaced by a fluctuations of supply and demand for foreign managed floating and single-exchange rate currencies in the market. This is one important system. The exchange rate was devaluated element contributing to an increase in foreign close to the market one. The State canceled its trade turnover of 20 percent per year. subsidized system through exchange rate for Facing with the above differences, the foreign trade activities. All payments abroad Government was forced to reform the foreign have been carried out in US dollars. exchange regulation and change the method In 1990, the exchange rate between the determining exchange rate. Exchange control Vietnamese dong and the US dollar increased is administered by the SBV and in 1991 as a by 50 percent against that at the beginning of part of its plans to establish a base for the the year. The escalation of the US dollar development of a foreign exchange market, the resulted in the dollar speculation and devious SBV established Foreign Exchange Transaction trading among domestic economic Centers (FETCs) in Hochirninh city and Hanoi organizations. Banks could not control the to trade the dong against the USD. circulation of currencies. In 1994, the US dollar repeatedly devaluated In this period, the exchange rate was unified against other currencies, especially against the by a single one, and was devaluated close to the Japanese yen. But in Vietnam's market, the market level. The State Bank of Vietnam value of the US dollar still increased creating (SBV) announced the official exchange rate good conditions for export, suitable to the based upon internal and external inflation rates, strategy for the outward-oriented economy of export-import exchange rate, the situation of Vietnam. On October 1, 1994, the interbank the balance of payments, and the fluctuation of foreign currency market was established instead exchange rates in the international markets, etc. of FETCs. The market is organized and Based on this official rate, the commercial managed by the SBV of Vietnam under banks determined their trading exchange rates Banking Decree law. Through the sign of the within allowed margins. In detail, the SBV market, SBV as a final buyer and seller uses the pursues a policy of a stable exchange rate, and Foreign Currency Fund to intervene effectively controls the dong's value against the US dollar in the market to implement monetary and fore

Exchange Rate Fluctuations and Macroeconomic Management 61 rate the Government. rate of the

hard

rate, to November 21, jJvAHH;C" a 1.0 ..,VAVV'.H either

Pacific Economic PEO/Structure APPENDIX

Figure Ai GROWTH RATES: PACIFIC REGION, 1981-95

01981-85 Economic Growth .1986-90 D 1991-95 12

10

B

6

4 (!)� 2 W � r ill o m ill L CL L -2 1

-4

Figure A2 INFLATION: PACIFIC REGION, 1981-95/96

01981-85 Inflation .1986-90 D 1991-95/6 30

25

20 c: 0 16 0;::: 15 .5

,.g0

10

5 L� � I � �rIJ 0 n D

Exchange Rate Fluctuations and Macroeconomic Management 63 - Table Nominal E

-0 P> (") Canada 97.3 94.6 94.7 90.1 85.4 84.0 88.0 94.8 98.5 100.0 101.8 96.5 90A 85.4 85.0 85.6 o· 782.2 100.0 87.3 84.1 75.4 72.6 76.9 74.0 m Chile 599.2 386.9 309.2 189.4 158.1 39.0 24.5 114.2 (") 0 China 280.6 252.7 242.1 206.2 162.9 138.5 128.5 128.5 127.0 100.0 89.9 86.7 83.0 55.5 57.3 57.5 :::> 0 Colombia 921 .7 783.8 637.0 498.2 352.9 258.6 207.0 67.9 131.3 100.0 79.3 66.1 58.2 59.5 55.0 48A 3 Hong Kong 139.3 128.3 107.1 99.6 100.0 99.8 99.9 99.8 99.9 100.0 100.2 100.6 100.7 100.8 100.7 o· Indonesia 291.7 278.6 202.7 179.6 165.9 143.7 12.1 109.3 104.1 100.0 94.5 90.8 88.2 85.2 82.0 78.7 Japan 65.7 58.1 61.0 61.0 60.7 85.9 100.1 113.0 105.0 100.0 107.5 114.3 130.2 141.7 153.9 133.1 Korea 103.9 96.8 91.2 87.8 81 .3 80.3 86.0 96.8 105.4 100.0 96.5 90.7 88.2 88.1 91 .8 88.0 Malaysia 117.4 115.8 116.5 115.4 108.9 104.8 107.4 103.3 99.9 100.0 98.4 106.2 105.1 103.1 108.0 107.5 -0 m Mexico 11480.0 4986.9 2341.9 1676.2 1094.8 459.7 204.1 123.7 192.4 100.0 93.2 90.9 90.3 83.3 43.8 37.0 New Zealand 145.7 25.9 112.0 96.9 83.5 87.8 99.2 109.9 100.3 100.0 97.0 90.1 90.6 99A 109.9 15.2 � Peru 44494435.2 26935206.4 1 537516.9 541 9827.5 712088.5 1347194.8 1116074.1 145885.1 7047.5 100.0 24.3 9.5 8.6 8.3 7.7 <= 92.7 $4 Philippines 307.7 284.7 218.8 145.6 130.7 119.3 118.2 15.2 1.8 100.0 88.5 95.3 89.6 92.0 94.5 c Singapore 85.8 84.7 85.8 85.0 82.4 83.2 86.1 90.1 92.9 100.0 104.9 1 12.2 18.7 127.9 128.5 CD Chinese Taipei 73.0 68.7 67.1 67.9 67.5 71 .1 84.7 94.1 .8 100.0 100.3 106.9 101.9 101.7 101.5 Thailand 17.3 11 .2 .2 108.2 94.2 97.3 99.5 99.5 100.0 100.3 100.7 101.1 101.7 102.7 .0 Vietnam 33440.0 27866.7 2229.3 557.3 16.7 100.0 55.2 44.7 46.2 45.8 45.5 45.5

Source: IMF, Intemational Financial Statistics, and ADS, Key Indicators.

Table A2 Real Effective

Canada 81 Chile 5.5 China 108.2 4.1 Colombia 136.6 134.5 86.5 Indonesia 1 97.4 95.7 1 1 .1 Korea 94.1 92.8

Mexico 1 1 New Zealand 95.5 85.8 99.8 89.3 102.5 103.8 105.6 78.3 94.4 01.1 95.6 United States

Source: IMF, Intemational Financial Statistics. and Asian Economic 92 89 96 25 55

3.2 3.2 2.9 6.4 3.8 4.7

Vietnam

Exchange Rate Fluctuations and Macroeconomic Management ---- 1

38.0 80.8 67.9 203.8 32.9 43.8 84.5 82.9

as

Pacific Economic Outlook, PEO/Structure PA CIFIC ECONOMIC OUTLOOK SPECIALIS TS ON STRUCTURAL IS SUES

COORDINATOR GENG Shuang + Akira KOHSAKA * Research Assistant Professor of Economics CNCPEC Osaka School of International Public Policy

Osaka University HUANG Fanzhang + Senior Research Fellow AU� TRA IA Academy of Macroeconomic Research Tony MAKIN* State Planning Commission Senior Lecturer in Economics Department of Economics COLOMBIA University of Queensland Rodrigo SUESCUN* Senior Economist

Stewart JONES + Central Bank of Colombia Counsellor (Economic) Australian Embassy, Tokyo Hernando VARGAS Herrera* Director, Macroeconomic Department C, AD Central Bank of Colombia James POWELL* Deputy Chief, International Division HONG I\ONG Bank of Canada TANG Kwong Yiu* Government Economist John C. SLOAN Economic Analysis Division Counsellor (Finance) Financial Services Branch Embassy of Canada in Tokyo Hong Kong Government

C I E' DONE IA Patricio ROJAS* Miranda S. GOELTOM* Manager of Macroeconomic Programming PEO Structure Coordinator Research Division INCPEC Central Bank of Chile JAPAN CHINA Chi Hung KWAN WANG Yuanlong* Senior Economist Senior Economist, Nomura Research Institute, Ltd. Institute of International Finance Bank of China Jun SAITO Senior Economist

BI Jiyao + Japan Center for Economic Research Research Fellow Academy of Macroeconomic Research State Planning Commission

Exchange Rate Fluctuations and Macroeconomic Management 01 Shinji TAKAGI RUSSIA Professor of Economics Valery R. NAZIROV* Faculty of Economics RNCPEC Osaka University c/o Department of Economic Cooperation Ministry of Foreign Affairs of the Russian KOREA Federation , CHO Dongchul * Moscow Interbank Currency Exchange Research Fellow (MICEX) Korea Development Institute

Vladimir I. IVANOV + MALAYSIA Chairman, Ong Hong Cheong* Asia-Pacific Regional Studies Department, Senior Analyst !MEMO, Russian Academy of Sciences & Institute of Strategic and International Studies Visiting Research Scholar, Faculty of Law, (ISIS) Malaysia University of Tokyo

MEX CO SINGAPORE Roberto MARINO* TAN Khee Giap* Manager of International Economic Affairs Head, Public Policies Studies Unit Bank of Mexico Nanyang Technological University

NEW ZEALAND TOH Mun Heng + John SAVAGE* Senior Lecturer Head of Macroeconomics Division Department of Business Policy New Zealand Institute of Economic Research Faculty of Business Administration National University of Singapore PERU Mauricio DE LA CUBA* CHINESE TAIPEI Chief of Department: Macroeconomic Analysis Ray B. DAWN* Central Reserve Bank of Peru Director of Financial Research Division Taiwan Institute of Economic Research Luis PALACIOS Deputy Manager of Investigation and Global Shiow-Ying WEN Analysis Associate Research Fellow Central Reserve Bank of Peru Taiwan Institute of Economic Research

PHILIPPINES UNITED STATES Caesar B. CORORA TON* Jeffrey B. NUGENT* Research Fellow Professor of Economics Philippine Institute for Development Studies Department of Economics University of Southern California

68 Pacific Economic Outlook, PEO/Structure Caroline M. BETTS* PEO/STRUCTURE SECRETARIAT Assistant Professor ISHIKAWA Masumi Department of Economics Deputy Executive Director University of Southern California Japan Committee for PEO

VIETNAM ANZAI Sayuri NGUYEN Huu Hai* Program Officer Chief, Division of Foreign Exchange Rates Japan Committee for PEO State Bank of Vietnam Michael A. THOMPSON

NGUYEN Van Dinh + Associate Professor, Business & Economics Lecturer of Banking and Finance Kansai Gaidai University National Economics University

TRAN Kim Chung + Research Fellow!Forecaster Central Institute of Economic Management

Notes:

* indicates the author of the individual country/region summary in this issue. The positions and affiliations are as of September 1996 when the second Sp ecialists Meeting was held. Those with

+ are as of March 1996, at the time of the first Sp ecialists Meeting.

Exchange Rate Fluctuations and Macroeconomic Management 69 PACIFIC ECONOMIC COOPERATION COUNCIL MEMBE RS

PACIFIC ECONOMIC COOPERATION COUNCIL CHINA

PECC International Secretariat China National Committee for Pacific Economic 4 Nassim Road Cooperation (CNCPEC) Singapore 258372 c/o China Institute of International Studies Tel: 65-737-9823 3 Toutiao Taijichang Fax: 65-737-9824 Beijing, China 100005 Tel: 86-10-65 13-1421 AUSTRALIA Fax: 86- 1 0-6523-5135 Australian Pacific Economic Cooperation Committee (AUSPEC) COLOMBIA JG Crawford Building Colombia National Committee for Pacific Economic Australian National University Cooperation (COLPECC) Canberra ACT 0200, Australia Ministry of Foreign Affairs Tel: 61-6-249-0153 Calle 10 No 5-51 Fax: 61-6-249-0169 Santafe de Bogota, Colombia Tel: 57- 1 -233-2625 BRUNEI DARUSSALAM Fax: 57- 1 -283-8441 Brunei Darussalam Committee for Pacific Economic Cooperation (BDCPEC) HONG KONG, CHINA Economics Department, Ministry of Foreign Affairs Hong Kong Committee for Pacific Economic Cooperation Jalan Subok (HKCPEC) Bandar Seri Begawan 1120, Brunei Darussalam c/o Trade Department, 18/F Trade Department Tower Tel: 673-2-261-274 700 Nathan Road Fax: 673-2-261 -703 Kowloon, Hong Kong Tel: 852-2398-5305 CANADA Fax: 852-2789-249 1 Canadian National Committee for Pacific Economic Cooperation (CANCPEC) INDONESIA c/o Asia Pacific Foundation of Canada Indonesian National Committee for Pacific Economic 666-999 Canada Place Cooperation (INCPEC) Vancouver, BC, V6C 3El c/o Centre for Strategic and International Studies (CSIS) Canada Jalan Tanah Abang IlU23-27 Tel: 1-604-684-5986 Jakarta, 10160, Indonesia Fax: 1-604-681-1370 Tel: 62-21-386-5532 Fax: 62-21-384-75 17 CHILE

Chilean National Committee for Pacific Economic JAPAN Cooperation (CHILPEC) Japan Committee for Pacific Economic Cooperation c/o Chile Pacific Foundation (JANCPEC) Av. Los Leones 382, Of. 701, Providencia c/o Japan Institute of International Affairs Santiago, Chile IIF, Kasumigaseki Building Tel: 56-2-334-3200 3-2-5 Kasumigaseki, Chiyoda-ku Fax: 56-2-334-320 1 Tokyo 100, Japan Tel: 81-3-3503-7744 Fax: 81-3-3503-6707

70 Pacific Economic Outlook, PEO/Structure KOREA RUSSIA

Korea National Committee for Pacific Economic Russian National Committee for Pacific Economic Cooperation (KOPEC) Cooperation (RNCPEC) 300-4, Yeorngok-dong; Seochu-gu Department of Economic Cooperation Seoul 137-800, Korea Ministry of Foreign Affairs Tel: 82-2-3460-1239 Arbat 54/2 Fax: 82-2-3460- 1244 121200 Moscow, Russian Federation Tel : 7-095-241-3530 MALAYSIA Fax: 7-095-253-9088 Malaysia National Committee for Pacific Economic Cooperation (MANCPEC) SINGAPORE c/o Institute of Strategic and International Studies (ISIS) Singapore National Committee for Pacific Economic No. 1 Pesiaran Sultan Salahuddin Cooperation (SINCPEC) P.O. Box 12424 50778 Kuala Lumpur, Malaysia c/o School of Accountancy and Business Tel: 60-3-293-9366 Room 01A-09 Fax: 60-3-293-9430 Nanyang Technological University Nanyang A venue, Singapore 639798 MEXICO Tel: 65-799-4761 Mexico National Committee for Pacific Economic Fax: 65-793-0523 Cooperation (MXCPEC) c/o General Director for Economic Affairs with Asia, CHINESE TAIPEI Pacific, and North America Chinese Taipei Pacific Economic Cooperation Committee Ministry of Foreign Affairs (CI'PECC) Flores Mag6n No.2, 1st Floor c/o Taiwan Institute of Economic Research 06900 Mexico, DF 8F, 16-8, Tehwei Street Tel: 525-782-4158 Taipei, Taiwan Fax: 525-1 17-4218 Tel: 886-2-586-5000 Fax: 886-2-594-6528 NEW ZEALAND

New Zealand Committee for the Pacific Economic THAILAND Cooperation Council (NZPECC) Thailand National Committee for Pacific Economic c/o Asia 2000 Foundation Cooperation (TNCPEC) Level 7 AMP House, 109 Featherston Street Department of Economic Affairs P.O. Box 10144 Ministry of Foreign Affairs Wellington, New Zealand Saranrom Palace Tel : 64-4-47 1-2320 Bangkok 10200, Thailand Fax: 64-4-47 1-2330 Tel: 66-2-225-7385 Fax: 66-2-226-1841 PERU

Peruvian National Committee for Pacific Economic UNITED STATES Cooperation (PERUPEC) United States National Committee for Pacific Economic Ministry of Foreign Affairs Cooperation (USNCPEC) Palacio Torre Tagle 1112 16th Street NW, Suite 520 Jr. Ucayali 363 Washington, DC 20036, U.S.A. Lima, Peru Tel: 1-202-293-3995 Tel: 51-1-426-0130 Fax : 1-202-293-1402 Fax: 51-1-426-2686 VIETNAM PHILIPPINES Vietnam National Committee for Pacific Economic Philippine Pacific Economic Cooperation Committee Cooperation (VNCPEC) (PPECC) c/o Executive Vice Chair/CEO c/o APEC Foundation of the Philippines, Inc. 171 Vo Thi Sau, Q3 8/F Ramon Cojuangco Building Ho Chi Minh City SR Vietnam Makati Avenue, Makati City Tel : 84-8-823-0301 Philippines Fax: 84-8-829-4472 Tel: 63-2-817-1970 Fax: 63-2-8 1 0-4444 PACIFIC ISLANDS NATIONS South Pacific Forum Secretariat Private Mail Bag Suva, Fij i Tel: 679-312-600 Fax: 679-301-102

Exchange Rate Fluctuations and Macroeconomic Management 71