Riikka Nuutilainen, Bank of Finland, Institute for Economies in Transition (BOFIT): The paper focuses on currencies of eight East Asian countries1 and studies their integration and time-varying interconnectedness. The exercise uses data on daily exchange rate returns against the U.S. dollar from 21 July 2005 (after China relaxed its exchange rate peg) to 31 December 2018. The approach allows for estimating how much a system is integrated using the connectedness matrix. The paper also studies the pairwise contributions between each currency pair (gains from the system, contributions to the system and their difference, the “net”contribution) and constructs a network linking all net contributions together.
Unexpectedly it is the Singapore dollar, and none of the three major countries’ currencies (China, Japan, or Korea), that is the most important currency explaining most of the variation in the East Asian markets. The Singapore dollar is the top contributor (contributing around half of...