How Did the Dollar Peg Fail in Asia?
In this paper we have constructed a theoretical model in which Asian firms maximize their profit, competing with Japanese and US firms in their markets. The duopoly model is used to determine export prices and volumes in response to the exchange rate fluctuations vis-…-vis the Japanese yen and the US dollar. Then, the optimal basket weight to minimize the fluctuation of the growth rate of trade balance is derived. These are the novel features of our model. The export price equation and export volume equation are estimated for several Asian countries for the sample period of 1981 to 1996. Results are generally reasonable. The optimal currency weights for the yen and the US dollars are derived and compared with actual weights that had been adopted before the currency crisis of 1997. For all the countries in the sample, it is shown that the optimal weight of the yen is significantly higher than the actual weight.
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Volume (Year): 12 (1998)
Issue (Month): 4 (December)
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- Wei, S.J. & Frankel, J.A., 1992.
"Yen Bloc or Dollar Bloc: Exchange Rate Policies of the East Asian Economies,"
92-08, University of Birmingham - International Financial Group.
- Jeffrey A. Frankel & Shang-Jin Wei, 1994. "Yen Bloc or Dollar Bloc? Exchange Rate Policies of the East Asian Economies," NBER Chapters, in: Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, NBER-EASE Volume 3, pages 295-333 National Bureau of Economic Research, Inc.
- 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.
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- Flanders, M June & Helpman, Elhanan, 1979. "An Optimal Exchange Rate Peg in a World of General Floating," Review of Economic Studies, Wiley Blackwell, vol. 46(3), pages 533-42, July.
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