Real Exchange Rate Dynamics and Monetary Integration in Crisis-Affected Regions

This paper examines Generalised Purchasing Power Parity (G-PPP) across three regions whose constituent countries are closely linked economically and have been affected by a financial crisis. G-PPP is particularly appropriate when interdependence is high and this is examined using the Johansen multivariate cointegration procedure. The extent of convergence towards G-PPP is assessed in the preand post-crisis period across the EMS crisis in Europe in 1992, the Latin American crisis in 1994, and the South East Asian crisis in 1997. This includes assessment of whether a long-run equilibrium relationship between the real exchange rates exists within the three groups and quantifying the speed of adjustment to this equilibrium. The econometric results help to indicate how regional exchange rate policy may have evolved following a major financial shock. In addition, economic implications are set out from a monetary integration perspective.