On the Desirability of a Regional Basket Currency Arrangement
AbstractThis paper considers a theoretical model to examine an optimal exchange rate regime for (Asian) emerging market economies that export goods to the U.S., Japan, and neighboring countries. The optimality of the exchange rate regime is defined as minimizing the fluctuation of trade balances, in the environment where the yen-dollar exchange rate fluctuates. Since the de facto dollar peg regime is blamed as one of the factors that caused the Asian currency crisis, the question of the optimal exchange rate regime is quite relevant in Asia. The novelty of this paper is to show how an emerging market economy's choice of the exchange rate regime (or weights in the basket) is dependent on the neighboring country's. The dollar weights in the currency baskets of the two countries are determined as a Nash equilibrium. In general, there are multiple equilibria, and a coordination failure' may result.
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Date of creation: Nov 2000
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Other versions of this item:
- Ogawa, Eiji & Ito, Takatoshi, 2002. "On the Desirability of a Regional Basket Currency Arrangement," Journal of the Japanese and International Economies, Elsevier, vol. 16(3), pages 317-334, September.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
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- 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.
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- Jeffrey A. Frankel & Shang-Jin Wei, 1994.
"Yen Bloc or Dollar Bloc? Exchange Rate Policies of the East Asian Economies,"
in: Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, NBER-EASE Volume 3, pages 295-333
National Bureau of Economic Research, Inc.
- Wei, S.J. & Frankel, J.A., 1992. "Yen Bloc or Dollar Bloc: Exchange Rate Policies of the East Asian Economies," Papers 92-08, University of Birmingham - International Financial Group.
- Jeffrey A. Frankel & Shang-Jin Wei, 1992. "Yen bloc or dollar bloc: exchange rate policies of the East Asian economies," Pacific Basin Working Paper Series 93-01, Federal Reserve Bank of San Francisco.
- 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.
- Marston, Richard C., 1990. "Pricing to market in Japanese manufacturing," Journal of International Economics, Elsevier, vol. 29(3-4), pages 217-236, November.
- June Flanders, M. & Tishler, Asher, 1981. "The role of elasticity optimism in choosing an optimal currency basket with applications to Israel," Journal of International Economics, Elsevier, vol. 11(3), pages 395-406, August.
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