The AMU Deviation Indicators Based on the Purchasing Power Parity and Adjusted by the Balassa-Samuelson Effect

Author Name OGAWA Eiji  (Faculty Fellow, RIETI) /Zhiqian WANG  (Hitotsubashi University)
Creation Date/NO. December 2012 12-E-078
Research Project Research on a Currency Basket
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This paper investigates how the Asian Monetary Unit (AMU) Deviation Indicators for surveillance measurements among East Asian currencies are improved by changing their benchmark rates from the constant rates in 2000-2001 to time-varying rates based on their purchasing power parities (PPPs). The consumer price indexes (CPIs) are used to calculate their PPPs as a time-varying benchmark for the AMU Deviation Indicators. Because the CPIs include prices of non-tradable goods, the PPPs based on the CPIs have a problem related with the Balassa-Samuelson effect. For this reason, the PPPs adjusted by the Balassa-Samuelson effect should be used to calculate when the CPIs are used as price data. This paper compares the PPP-based AMU Deviation Indicator with the PPP-based AMU Deviation Indicator adjusted by the Balassa-Samuelson effect. We conclude that both indicators are also useful in making surveillance of overvaluation or undervaluation of the intra-regional exchange rates of East Asian currencies.