How Does the Regional Monetary Unit Work as a Surveillance Tool in East Asia?

To utilize the Chiang Mai Initiative Multilateralization (CMIM) for crisis management, macroeconomic surveillance of the member economies should be ex-ante conditionality. Hence, the Association of Southeast Asian Nations (ASEAN) plus Three Macroeconomic Research Office (AMRO) was established to detect possibilities of economic crises and to prompt the restructuring or reforming of a rigid structure or system. Although monitoring the exchange rates of the currencies of these countries vis-à-vis the U.S. dollar is essential for surveillance, the AMRO should have an original tool to consider region-specific factors and more efficient tools than the International Monetary Fund (IMF) surveillance.

Therefore, this paper proposes utilizing a regional monetary unit (RMU) in monitoring exchange rates. Empirical analysis has confirmed that deviation indicators of RMUs such as the Asian Monetary Unit Deviation Indicators (AMU DI) are expected to be useful for macroeconomic surveillance. This paper also tries to define the country's equilibrium exchange rate vis-à-vis a RMU to provide useful statistical information about exchange rate misalignments among East Asian currencies by employing the permanent-transitory decomposition proposed by Gonzalo and Granger (1995).