Exchange Rate Policy and Macroeconomic Management

Exchange Rate Policy and Macroeconomic
Management in ASEAN Countries

Peter J. Montiel

This paper is motivated by the issue of how to interpret the recent behavior of the real effective exchange rate (REER) in five ASEAN countries, which has been relatively stable since the late 1980s despite the arrival of sizable capital inflows. There are two possible explanations for this outcome: It could reflect active management of the nominal exchange rate in pursuit of a competitiveness objective; or it could be an "equilibrium phenomenon," if other fundamentals moved in such a way as to offset the tendency of capital inflows to appreciate the real exchange rate.

The estimated long-run equilibrium REER is found to have responded to different factors in each of these countries, and to have exhibited substantial variability over time, suggesting that more is at work in the determination of the equilibrium REER than simple purchasing power parity or long-run sectoral productivity differentials (the Balassa-Samuelson effect).

The recent capital inflow episode did not result in an appreciation of the long-run REER in all of these countries. The equilibrium rate appreciated in Singapore after about 1987, and in the Philippines after 1990, but stabilized or continued to depreciate in Indonesia, Malaysia, and Thailand.

There is no evidence of misalignment in the real exchange rates of any of the countries in the sample at the end of 1994: the sizes of the gaps between the actual and estimated equilibrium REERs are not meaningful in a statistical sense. The central conclusion of this study, therefore, is that current REER performance in these countries is best interpreted as being consistent with long-run equilibrium.

Peter J. Montiel is Professor of Economics at Williams College, USA. He was previously Chief of the Macroeconomics Division at the World Bank.

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