AMU DEVIATION INDICATORS BASED ON PURCHASING POWER PARITY AND ADJUSTED BY BALASSA–SAMUELSON EFFECT

Abstract

This study investigates how the Asian Monetary Unit (AMU) deviation indicators for surveillance of East Asian currencies are improved by changing their benchmark rates from the constant 2000–2001 rates to time-varying ones based on purchasing power parities (PPPs). Consumer price indexes (CPIs) are used to calculate PPPs as a time-varying benchmark for AMU deviation indicators. Because CPIs include the prices of non-tradable goods, PPPs based on CPIs have a problem relating to the Balassa–Samuelson effect. Therefore, the PPPs adjusted by the Balassa–Samuelson effect should be used for calculation when CPIs are used for price data. This study compares the PPP-based AMU deviation indicator with the one adjusted by the Balassa–Samuelson effect. We conclude that both the indicators are useful for surveillance of overvaluation or undervaluation of intra-regional exchange rates of East Asian currencies.