We look at a country that has chosen to fix its exchange rate. The country can choose to tie its currency to alternative countries. The question is which one it will be optimal to choose. Three factors are considered: Trade share, real exchange rate variation and real shocks. A large trade share with a country counts in favour of a tie to that country. The same case with large symmetric shocks. Contrary to what is found in the literature, a large exchange rate variation against a trading partner raises the benefits of a tie to that country.
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Length: 29 pages Date of creation: 1999 Date of revision: Handle: RePEc:fth:bereco:0799
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Find related papers by JEL classification: F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics