Asian Currency Baskets: An Answer in Search of a Question?
AbstractThis 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-à-vis currencies outside the region.
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Bibliographic InfoPaper provided by Singapore Management University, School of Economics in its series Working Papers with number 02-2007.
Length: 36 pages
Date of creation: Mar 2007
Date of revision:
Publication status: Published in SMU Economics and Statistics Working Paper Series
Other versions of this item:
- Charles Adams & Hwee Chow, 2009. "Asian Currency Baskets: An Answer in Search of a Question?," Open Economies Review, Springer, vol. 20(3), pages 403-423, July.
- Charles Adams & Hwee Kwan Chow, 2007. "Asian Currency Baskets : An Answer in Search of a Question?," Finance Working Papers 22055, East Asian Bureau of Economic Research.
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
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