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Asian Currency Baskets : An Answer in Search of a Question?

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  • Charles Adams

    (SMU)

  • Hwee Kwan Chow

Abstract

This paper considers how a regional currency basket and the associated divergence indicators could be used in official surveillance. Recently, proponents of Asian currency baskets have referred to the role the ECU played in constructing exchange rate divergence indicators in Europe as evidence of the intrinsic usefulness of currency baskets for exchange rate monitoring. We show in this paper a number of problems with the use of regional currency-basket based divergence indicators. First, at a technical level, such indicators involve tracking regional exchange rates against a moving currency basket and can obscure underlying movements in bilateral exchange rates. Second, currency baskets generally treat currencies asymmetrically leading to difficulties interpreting the derived measures of divergence. Third, intra-regional exchange rate monitoring can lead to potentially serious N-1 or anchor problems. Some of these difficulties can be addressed by bilateral divergence indicators but means will need to be found to anchor regional exchange rate surveillance vis--vis currencies outside the region.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 22055.

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Date of creation: Jan 2007
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Handle: RePEc:eab:financ:22055

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Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
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Related research

Keywords: Regional Currency Basket; Exchange Rate Divergence Indicators; Surveillance;

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  1. Barry Eichengreen, 2006. "The Parallel-Currency Approach to Asian Monetary Integration," American Economic Review, American Economic Association, vol. 96(2), pages 432-436, May.
  2. Ogawa, Eiji & Shimizu, Junko, 2006. "Stabilization of effective exchange rates under common currency basket systems," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 590-611, December.
  3. Eiji Ogawa & Junko Shimizu, 2005. "A Deviation Measurement for Coordinated Exchange Rate Policies in East Asia," Discussion papers 05017, Research Institute of Economy, Trade and Industry (RIETI).
  4. Barry Eichengreen and Tamim Bayoumi., 1996. "Is Asia an Optimum Currency Area? Can It Become One? Regional, Global and Historical Perspectives on Asian Monetary Relations," Center for International and Development Economics Research (CIDER) Working Papers, University of California at Berkeley C96-081, University of California at Berkeley.
  5. Ronald McKinnon & Gunther Schnabl, 2003. "The East Asian Dollar Standard, Fear of Floating, and Original Sin," Working Papers 112003, Hong Kong Institute for Monetary Research.
  6. John Williamson, 2005. "A Currency Basket for East Asia, Not Just China," Policy Briefs PB05-01, Peterson Institute for International Economics.
  7. Chow, Hwee Kwan & Kim, Yoonbai, 2003. "A common currency peg in East Asia? Perspectives from Western Europe," Journal of Macroeconomics, Elsevier, Elsevier, vol. 25(3), pages 331-350, September.
  8. McKinnon, Ronald I., 2004. "The East Asian dollar standard," China Economic Review, Elsevier, vol. 15(3), pages 325-330.
  9. Eiji Ogawa & Junko Shimizu, 2006. "Stabilization of Effective Exchange Rates Under Common Currency Basket Systems," NBER Working Papers 12198, National Bureau of Economic Research, Inc.
  10. Clifford R Dammers & Robert N McCauley, 2006. "Basket weaving: the euromarket experience with basket currency bonds," BIS Quarterly Review, Bank for International Settlements, March.
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