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Should small open economies in East Asia put all their eggs in one basket: the role of balance sheet effects

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Author Info

  • Slavi T. Slavov

    (Pomona College)

Abstract

Yen-dollar fluctuations increase macroeconomic instability in small economies in East Asia. I investigate the choice of an exchange rate regime for these countries so as to minimize the adverse effects of this volatility. I build a sticky-price dynamic model of a small economy whose trade is invoiced in dollar and yen. First, I show the conditions under which pegging to a tradeweighted basket of the two currencies is the optimal policy for the small economy. Then, I introduce net worth constraints and unhedged dollar borrowing which pull the optimal policy away toward putting a much greater weight on the dollar.

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File URL: http://128.118.178.162/eps/if/papers/0501/0501001.pdf
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Bibliographic Info

Paper provided by EconWPA in its series International Finance with number 0501001.

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Length: 35 pages
Date of creation: 12 Jan 2005
Date of revision:
Handle: RePEc:wpa:wuwpif:0501001

Note: Type of Document - pdf; pages: 35
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Web page: http://128.118.178.162

Related research

Keywords: East Asia; optimal basket pegs; balance sheet effects; exchange rate regimes;

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References

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  13. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, January.
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Citations

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Cited by:
  1. Teo, Wing Leong, 2009. "Should East Asia's currencies be pegged to the yen? The role of invoice currency," Journal of the Japanese and International Economies, Elsevier, vol. 23(3), pages 283-308, September.
  2. Ronald McKinnon & Gunther Schnabl, 2004. "The East Asian Dollar Standard, Fear of Floating, and Original Sin," Review of Development Economics, Wiley Blackwell, vol. 8(3), pages 331-360, 08.
  3. Slavov, Slavi T., 2008. "Measuring and modeling the effects of G-3 exchange rate fluctuations on small open economies: A natural experiment," Economic Systems, Elsevier, vol. 32(3), pages 253-273, September.
  4. Xu, Juanyi, 2011. "The optimal currency basket under vertical trade," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1323-1340.
  5. Kang Shi & Juanyi Xu, 2008. "The Optimal Currency Basket with Input Currency and Output Currency," Working Papers 172008, Hong Kong Institute for Monetary Research.
  6. Constant Lonkeng Ngouana, 2012. "Exchange Rate Volatility Under Peg: Do Trade Patterns Matter?," IMF Working Papers 12/73, International Monetary Fund.

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