Advanced Search
MyIDEAS: Login to save this article or follow this journal

Should East Asia's currencies be pegged to the yen? The role of invoice currency

Contents:

Author Info

  • Teo, Wing Leong

Abstract

Growing concern that a dollar peg exposes East Asian economies to fluctuations in the dollar-yen exchange rate has stimulated research on currency basket regimes as alternatives for these economies. However, existing studies have mostly ignored an important characteristic of East Asia, i.e., most of its international trade is invoiced in the U.S. dollars. This paper investigates how the preponderance of dollar invoicing affects optimal currency basket regimes for East Asian economies. I develop a three-country center-periphery sticky-price dynamic stochastic general equilibrium model for the analysis. The model is solved numerically by taking second-order approximations to the policy functions with the expected lifetime utility of households chosen as the welfare criterion. Contrary to the conjecture of existing literature, I show that predominance of dollar invoicing implies that the dollar should receive a smaller weight than suggested by bilateral trade shares between emerging markets in East Asia and the United States. The results hinge on the interaction of different degrees of pass-through implied by the choice of invoice currency and endogenous responses of monetary policies in the center countries.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/B6WMC-4W9XBB2-1/2/75ef8c844a590c9a62bc39309ad91a42
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Journal of the Japanese and International Economies.

Volume (Year): 23 (2009)
Issue (Month): 3 (September)
Pages: 283-308

as in new window
Handle: RePEc:eee:jjieco:v:23:y:2009:i:3:p:283-308

Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/622903

Related research

Keywords: Invoice currency Dollar standard Currency basket regime;

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," NBER Working Papers 7869, National Bureau of Economic Research, Inc.
  2. Michael B. Devereux & Charles Engel & Peter E. Storgaard, 2003. "Endogenous Exchange Rate Pass-through when Nominal Prices are Set in Advance," IEHAS Discussion Papers, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences 0304, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  3. Shioji, Etsuro, 2006. "Invoicing currency and the optimal basket peg for East Asia: Analysis using a new open economy macroeconomic model," Journal of the Japanese and International Economies, Elsevier, Elsevier, vol. 20(4), pages 569-589, December.
  4. Kawai, Masahiro, 2002. "Exchange Rate Arrangements in East Asia: Lessons from the 1997-98 Currency Crisis," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(S1), pages 167-204, December.
  5. Sutherland, Alan, 2002. "A Simple Second-Order Solution Method For Dynamic General Equilibrium Models," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3554, C.E.P.R. Discussion Papers.
  6. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  7. Henry Kim & Jinill Kim & Ernst Schaumburg & Christopher A. Sims, 2005. "Calculating and Using Second Order Accurate Solutions of Discrete Time Dynamic Equilibrium Models," Discussion Papers Series, Department of Economics, Tufts University, Department of Economics, Tufts University 0505, Department of Economics, Tufts University.
  8. Devereux, Michael B & Shi, Kang & Xu, Juanyi, 2004. "Global Monetary Policy Under a Dollar Standard," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4317, C.E.P.R. Discussion Papers.
  9. Schmitt-Grohé, Stephanie & Uribe, Martín, 2002. "Closing Small Open Economy Models," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3096, C.E.P.R. Discussion Papers.
  10. Oi, Hiroyuki & Otani, Akira & Shirota, Toyoichiro, 2004. "The Choice of Invoice Currency in International Trade: Implications for the Internationalization of the Yen," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 22(1), pages 27-63, March.
  11. Ronald McKinnon & Gunther Schnabl, 2002. "Synchronized Business Cycles in East Asia: Fluctuations in the Yen/Dollar Exchange Rate and China’s Stabilizing Role," Working Papers, Stanford University, Department of Economics 02010, Stanford University, Department of Economics.
  12. Stephanie Schmitt-Grohe & Martin Uribe, 2004. "Optimal Simple and Implementable Monetary and Fiscal Rules," NBER Working Papers 10253, National Bureau of Economic Research, Inc.
  13. Ronald I. McKinnon, 2001. "After the Crisis, The East Asian Dollar Standard Resurrected: An Interpretation of High Frequency Exchange Rate Pegging," Working Papers, Hong Kong Institute for Monetary Research 042001, Hong Kong Institute for Monetary Research.
  14. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  15. Ronald McKinnon & Gunther Schnabl, 2003. "The East Asian Dollar Standard, Fear of Floating, and Original Sin," Working Papers, Hong Kong Institute for Monetary Research 112003, Hong Kong Institute for Monetary Research.
  16. Yoshino, Naoyuki & Kaji, Sahoko & Suzuki, Ayako, 2004. "The basket-peg, dollar-peg, and floating: A comparative analysis," Journal of the Japanese and International Economies, Elsevier, Elsevier, vol. 18(2), pages 183-217, June.
  17. Cook, David & Devereux, Michael B, 2004. "External Currency Pricing and the East Asian Crisis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4642, C.E.P.R. Discussion Papers.
  18. Kollmann, Robert, 2003. "Monetary Policy Rules in an Interdependent World," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4012, C.E.P.R. Discussion Papers.
  19. Takatoshi Ito & Eiji Ogawa & Yuri Nagataki Sasaki, 1999. "How Did the Dollar Peg Fail in Asia?," NBER Working Papers 6729, National Bureau of Economic Research, Inc.
  20. Kim, Jinill, 2000. "Constructing and estimating a realistic optimizing model of monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 45(2), pages 329-359, April.
  21. Kim, Jinill & Kim, Sunghyun Henry, 2003. "Spurious welfare reversals in international business cycle models," Journal of International Economics, Elsevier, Elsevier, vol. 60(2), pages 471-500, August.
  22. Ogawa, Eiji & Ito, Takatoshi, 2002. "On the Desirability of a Regional Basket Currency Arrangement," Journal of the Japanese and International Economies, Elsevier, Elsevier, vol. 16(3), pages 317-334, September.
  23. Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0233, National Bureau of Economic Research, Inc.
  24. John Williamson, 2000. "Exchange Rate Regimes for Emerging Markets: Reviving the Intermediate Option," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number pa60, July.
  25. Kawai, Masahiro & Takagi, Shinji, 2000. "Proposed strategy for a regional exchange rate arrangement in post-crisis East Asia," Policy Research Working Paper Series, The World Bank 2503, The World Bank.
  26. Sutherland, Alan, 2005. "Incomplete pass-through and the welfare effects of exchange rate variability," Journal of International Economics, Elsevier, Elsevier, vol. 65(2), pages 375-399, March.
  27. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Solving dynamic general equilibrium models using a second-order approximation to the policy function," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(4), pages 755-775, January.
  28. Philippe BACCHETTA & Eric VAN WINCOOP, 1999. "Does Exchange Rate Stability Increase Trade and Welfare ?," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 9917, Université de Lausanne, Faculté des HEC, DEEP.
  29. Slavi T. Slavov, 2005. "Should small open economies in East Asia put all their eggs in one basket: the role of balance sheet effects," International Finance, EconWPA 0501001, EconWPA.
  30. Turnovsky, Stephen J., 1982. "A determination of the optimal currency basket : A macroeconomic analysis," Journal of International Economics, Elsevier, Elsevier, vol. 12(3-4), pages 333-354, May.
  31. Graham Bird & Ramkishen Rajan, 2002. "Optimal currency baskets and the third currency phenomenon: exchange rate policy in Southeast Asia," Journal of International Development, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 14(8), pages 1053-1073.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Kang Shi & Juanyi Xu, 2008. "The Optimal Currency Basket with Input Currency and Output Currency," Working Papers, Hong Kong Institute for Monetary Research 172008, Hong Kong Institute for Monetary Research.
  2. Shioji, Etsuro, 2006. "Invoicing currency and the optimal basket peg for East Asia: Analysis using a new open economy macroeconomic model," Journal of the Japanese and International Economies, Elsevier, Elsevier, vol. 20(4), pages 569-589, December.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:jjieco:v:23:y:2009:i:3:p:283-308. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.