The AMU Deviation Indicators Based on
the Purchasing Power Parity and
Adjusted by the Balassa-Samuelson Effect
Abstract
This paper investigates how the AMU Deviation Indicators for surveillance measurements among East Asian currencies are improved by changing their benchmark rates from the constant rates in 2000-2001 to time-varying rates based on their Purchasing Power Parities (PPPs). The Consumer Price Indexes (CPIs) are used to calculate their PPPs as a time-varying benchmark for the AMU Deviation Indicators. Because the CPIs include prices of non-tradable goods, the PPPs based on the CPIs have a problem related with the Balassa-Samuelson effect. For the reason, the PPPs adjusted by the Balassa-Samuelson effect should be used to calculate the AMU Deviation Indicators when the CPIs are used as price data. This paper compares the two types of the PPP-based AMU Deviation Indicators and the PPP-based AMU Deviation Indicators adjusted by the Balassa-Samuelson effect. We conclude that both the PPP- based AMU Deviation Indicators and the PPP-based AMU Deviation Indicators adjusted by the Balassa-Samuelson effect are also useful in making surveillance over overvaluation or undervaluation of the intra-regional exchange rates of East Asian currencies.
