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Exchange Rate Pegs and Foreign Exchange Exposure in East and South East Asia - page 13 / 33

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nevertheless indivisible from the monetary conditions that surround it. That is, an

exchange rate arrangement represents a monetary environment, not a single policy

instrument. This fact has implications for our empirical work. It precludes us from

separating the role of the exchange rate arrangement from the role of the supporting

monetary variables. What we examine, then, is the empirical link between foreign

exchange exposure and the monetary environment, the signature of which is the exchange

rate arrangement.

We look separately at exposure under the alternative arrangements that exist in our

sample. Specifically, we look at the exposure under an exchange rate peg, and we look at

the exposure without one. To do so, we estimate the following regression:

4

4

(3) ri,t

J 0 J h rh ,t

  • J w rw ,t

¦

E p ,m

D p ,t

sm ,t

¦

E n ,m

Dn ,t s

m ,t

  • wi,t

,

m1

m1

where Dp,t equals one when the firm’s home currency is pegged against another currency

and equals zero otherwise, and Dn,t = 1 - Dp,t ; and, the subscript m indexes the major

currencies. We are interested in the parameters ȕp and ȕn, which provide separate pegged

and nonpegged exposure estimates for the firms in countries that have had experience both

with and without a peg during the sample period.

To be useful, this specification requires that the firm’s home country have

experience with both pegged and nonpegged arrangements. This limits the estimation to

Indonesia, Korea, Malaysia, the Philippines, Taiwan, and Thailand. We use the de facto

exchange rate arrangements; that is, we identify the dates of the exchange rate peg by

observing the behavior of the exchange rates, not by relying on the officially reported

12

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