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Dynamic Effect of Change in Exchange Rate System -From the Fixed Exchange Rate Regime to the Basket-peg or Floating Regime

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Author Info

  • Naoyuki Yoshino

    (Department of Economics, Keio University)

  • Sahoko Kaji

    (Department of Economics, Keio University)

  • Tamon Asonuma

    (International Monetary Fund)

Abstract

We quantify dynamic effect of shifts of exchange rate system from the dollar-peg to the basket- peg or floating and obtain transition paths for the shifts, based on a dynamic small open-economy model. We find that a small open country will be better off shifting to the basket-peg or floating regime than maintaining the dollar-peg regime with capital control, in the long-run. Furthermore, because of welfare costs associated with volatility in nominal interest rates, the longer the transition period, the more benefits a country gains from shifting suddenly to the basket-peg from the dollar- peg regime rather than proceeding gradually. Thidly, focusing on sudden shifts to desired regimes, welfare gain of the country is higher under a shift to the basket-peg if the exchagne rate fluctuates remarkably. Lastly, concerning with shifting to the managed floating, it is less attractive to adopt compared with shifting to the basket-peg as intervening to maintain the exchange rate for certain periods leads to higher losses as the authority lacks monetary policy autonomy..

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File URL: http://ies.keio.ac.jp/old_project/old/gcoe-econbus/pdf/dp/DP2011-026.pdf
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Bibliographic Info

Paper provided by Keio/Kyoto Joint Global COE Program in its series Keio/Kyoto Joint Global COE Discussion Paper Series with number 2011-026.

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Length: 38 pages
Date of creation: Aug 2011
Date of revision:
Handle: RePEc:kei:dpaper:2011-026

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  1. Yin-Wong Cheung & Menzie D. Chinn & Eiji Fujii, 2007. "The Overvaluation of Renminbi Undervaluation," CESifo Working Paper Series 1918, CESifo Group Munich.
  2. Eiji Ogawa & Takatoshi Ito, 2000. "On the Desirability of a Regional Basket Currency Arrangement," NBER Working Papers 8002, National Bureau of Economic Research, Inc.
  3. 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.
  4. Warwick J McKibbin & Will Martin, 1998. "The East Asian Crisis: Investigating Causes and Policy Responses," Departmental Working Papers 1998-06, The Australian National University, Arndt-Corden Department of Economics.
  5. 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, vol. 18(2), pages 183-217, June.
  6. 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., vol. 14(8), pages 1053-1073.
  7. Naoyuki Yoshino & Sahoko Kaji & Yoko Ibuka, 2003. "The Stabilization of an Open Economy with Capital Controls: An Analysis Using Malaysian Data," Asian Economic Papers, MIT Press, vol. 2(3), pages 63-83.
  8. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  9. 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, vol. 20(4), pages 569-589, December.
  10. ChangJin Kim & Jong-Wha Lee, 2008. "Exchange Rate Regime And Monetary Policy Independence In East Asia," Pacific Economic Review, Wiley Blackwell, vol. 13(2), pages 155-170, 05.
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