Kang Shi (The Chinese University of Hong Kong) Juanyi Xu (Hong Kong University of Science and Technology)
Abstract
This paper explores the determination of the optimal currency basket in a small open economy general equilibrium model with sticky prices. In contrast to traditional literature, we focus on an economy with vertical trade, where one currency is used as the invoicing currency of imported intermediate goods and is called the "input currency", while the other currency is used for the invoicing of exported finished goods and is called the "output currency". We find that in the optimal currency basket the weight between the input currency and the output currency depends critically on the structure of vertical trade. Moreover, we show that if a country decides to choose a single-currency peg, then the choice of pegging currency depends mainly on how other economies respond to external exchange rate fluctuations. In a sense, our paper provides a case for the Chinese RMB peg in some East Asian economies, given the importance of the RMB as an input currency.
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Publisher Info
Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number
172008.
Length: 27 pages Date of creation: Sep 2008 Date of revision: Handle: RePEc:hkm:wpaper:172008
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Find related papers by JEL classification: F3 - International Economics - - International Finance F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
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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.:
Reinhart, Carmen & Calvo, Guillermo, 2002.
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[Downloadable!]
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