How Integrated Were Foreign Exchange Markets in the Asia-Pacific Region in the Past?

Evidence from the Parallel Market

The East Asian currency crisis of 1997-98 has led to considerable interest on the interlinkages between foreign exchange markets in the Asian region. Implicit in the literature is the assumption that the currency crisis can be linked to close integration of the goods and capital markets of the Asian economies both with each other and with the advanced market economies in recent years. In this paper, we find evidence of strong interlinkages between the parallel exchange rates of five East Asian countries: Hong Kong, Indonesia, Malaysia, The Philippines and Thailand in the 1970s and early 1980s, a period when it was generally believed that there may not have been as strong an interlinkage between these economies in terms of international trade or finance as we observe in the 1990s. Thus, interlinkages between exchange rate markets in the Asian region are not a recent phenomenon and may not necessarily be linked to the capital and commodity market liberalisation undertaken by the Asian economies in recent years.