Accounting for real exchange rate changes in East Asia

This study measures the proportion of real exchange rate movements that can be accounted for by movements in the relative price of non-traded goods using the framework employed by Engel [1999. Accounting for U.S. real exchange rate changes. Journal of Political Economy 107, 507-538]. Among the 21 bilateral Asian-Pacific real exchange rates considered here, that proportion is found to be trivially small for all possible horizons that the data allow - from one month up to 25 years. This pattern appears unaffected by the cross-sectional variation in either income level, or the degree of openness present among these Pacific-Rim economies. The only qualifications occur when considering fixed (or semi-fixed) exchange rate regimes.