Optimal currency basket in a world of generalized floating : An application to the Nordic countries
The purpose of this paper is to derive optimal weights for a currency basket taking into consideration the objective of the policymaker. We carefully distinguish between the two terms: effective exchange rate index and currency basket, which are often used interchangeably in the literature. In general, our analysis is an extension of the work of Branson-Katseli and Lipschitz-Sundararajan and then applied to the Nordic countries. We use the policy objective of minimizing fluctuation in export production and illustrate our results using Norway, Sweden and Finland. The weights we derive create optimal currency baskets which are different from the ones used in the countries.
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- Branson, William H. & Katseli-Papaefstratiou, Louka T., 1980. "Income instability, terms of trade, and the choice of exchange rate regime," Journal of Development Economics, Elsevier, vol. 7(1), pages 49-69, February.
- Black, Stanley W, 1978. "International Finance: Discussion," Journal of Finance, American Finance Association, vol. 33(3), pages 813-815, June.
- Asheim, Geir B., 1984. "Properties of a system of currency baskets," Journal of International Economics, Elsevier, vol. 16(3-4), pages 311-317, May.