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Optimal currency baskets and the third currency phenomenon: exchange rate policy in Southeast Asia

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Author Info
Graham Bird (Surrey Centre of International Economic Studies, University of Surrey, Guildford, UK)
Ramkishen Rajan (School of Economics, University of Adelaide, Australia)

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Abstract

Recent financial crises seem to have led to the broad consensus that developing countries should steer clear of exchange rate regimes that lie anywhere between the two extremes or [corner solutions] of credibly fixed or flexible arrangements. But is this a reasonable position to adopt? Would developing countries be well advised to follow this policy recommendation? Should developing countries opt only for the corner solutions? Did the crisis-hit South-east Asian countries (Indonesia, Malaysia, Thialand and Philippines), make a mistake in effectively pegging to the US dollar rather than in pegging per se? Did pegging to the US dollar constitute a sub-optimal peg? If it did, what would have been the optimum peg? This paper attempts to provide answers to the preceding questions. The paper also conjectures more broadly about monetary policy in developing countries. Copyright © 2002 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jid.938
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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Journal of International Development.

Volume (Year): 14 (2002)
Issue (Month): 8 ()
Pages: 1053-1073
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Handle: RePEc:wly:jintdv:v:14:y:2002:i:8:p:1053-1073

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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.:

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    Other versions:
  2. Williamson, John, 1998. "Crawling Bands or Monitoring Bands: How to Manage Exchange Rates in a World of Capital Mobility," International Finance, Blackwell Publishing, vol. 1(1), pages 59-79, October. [Downloadable!] (restricted)
  3. Robert J. Barro & David B. Gordon, 1983. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Williamson, John, 1982. "A survey of the literature on the optimal peg," Journal of Development Economics, Elsevier, vol. 11(1), pages 39-61, August. [Downloadable!] (restricted)
  5. Ramkishen S. Rajan & Reza Siregar & Iman Sugema, 2003. "Why was there a precrisis capital inflow boom in Southeast Asia?," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(3), pages 265-283. [Downloadable!]
  6. Esteban Jadresic & Paul R. Masson & Paolo Mauro & Michael Mussa & Alexander K. Swoboda & Andrew Berg, 2000. "Exchange Rate Regimes in an Increasingly Integrated World Economy," IMF Occasional Papers 193, International Monetary Fund. [Downloadable!]
  7. Atish R. Ghosh & Anne Marie Gulde & Jonathan David Ostry & Holger C. Wolf, 1995. "Does the Nominal Exchange Rate Regime Matter?," IMF Working Papers 95/121, International Monetary Fund.
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  8. Leonardo Hernández & Peter Montiel, 2001. "Post-Crisis Exchange Rate Policy in Five Asian Countries: Filling in the "Hollow Middle"?," IMF Working Papers 01/170, International Monetary Fund. [Downloadable!]
  9. Thomas D. Willett, 1998. "Credibility and Discipline Effects of Exchange Rates as Nominal Anchors: The Need to Distinguish Temporary from Permanent Pegs," The World Economy, Blackwell Publishing, vol. 21(6), pages 803-826, 08. [Downloadable!] (restricted)
  10. Paul R. Masson, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
  11. Ito, Takatoshi & Ogawa, Eiji & Sasaki, Yuri Nagataki, 1998. "How Did the Dollar Peg Fail in Asia?," Journal of the Japanese and International Economies, Elsevier, vol. 12(4), pages 256-304, December. [Downloadable!] (restricted)
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  12. Mark M. Spiegel, 1995. "Sterilization of capital inflows through the banking sector: evidence from Asia," Economic Review, Federal Reserve Bank of San Francisco, pages 17-34. [Downloadable!]
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  13. Eduardo Borensztein & Andrew Berg, 2000. "The Pros and Cons of Full Dollarization," IMF Working Papers 00/50, International Monetary Fund.
  14. Mohsin S. Khan & Peter Montiel & Bijan B. Aghevli, 1991. "Exchange Rate Policy in Developing Countries: Some Analytical Issues," IMF Occasional Papers 78, International Monetary Fund.
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  16. Claessens, Stijn, 1992. "The Optimal Currency Composition of External Debt: Theory and Applications to Mexico and Brazil," World Bank Economic Review, Oxford University Press, vol. 6(3), pages 503-28, September.
  17. Benassy-Quere, Agnes, 1999. "Optimal Pegs for East Asian Currencies," Journal of the Japanese and International Economies, Elsevier, vol. 13(1), pages 44-60, March. [Downloadable!] (restricted)
  18. Eichengreen, B. & Masson, P. & Savastano, M. & Sharma, S., 1999. "Transition Strategies and Nominal Anchors on the Road to Greater Exchange-Rate Flexibility," Princeton Essays in International Economics 213, International Economics Section, Departement of Economics Princeton University,.
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(explanations, 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.)

  1. Tony Cavoli & Ramkishen S. Rajan, 2005. "Have Exchange Rate Regimes in Asia become More Flexible Post crisis? Re- Visiting the Evidence," SCAPE Policy Research Working Paper Series 0519, National University of Singapore, Department of Economics, SCAPE. [Downloadable!]
  2. Kang-Soek Lee & Philippe Saucier, 2005. "La coopération monétaire régionale est-elle un préalable à l'intégration commerciale de l'Asie ?," Mondes en développement, De Boeck Université, vol. 130(2), pages 95-110. [Downloadable!]
  3. Peter Wilson & Henry Ng Shang Ren, 2006. "Managing Exchange Rate Volatility: A Comparative Counterfactual Analysis of Singapore 1994 to 2003," SCAPE Policy Research Working Paper Series 0608, National University of Singapore, Department of Economics, SCAPE. [Downloadable!]
  4. Richard Pomfret, 2005. "Sequencing Trade and Monetary Integration," Others 0502004, EconWPA. [Downloadable!]
  5. Peter Wilson, 2007. "Exchange Rate Cooperation in East Asia – Why a Basket Approach may be best," SCAPE Policy Research Working Paper Series 0707, National University of Singapore, Department of Economics, SCAPE. [Downloadable!]
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