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Why Do Countries Peg the Way They Peg? The Determinants of Anchor Currency Choice

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  • Nienke Oomes
  • Christopher M. Meissner

Abstract

What determines the currency to which countries peg or "anchor" their exchange rate? Data for over 100 countries between 1980 and 1998 reveal that trade network externalities are a key determinant. This implies that anchor currency choice may well be suboptimal in that certain currencies, e.g., the U.S. dollar, could be oversubscribed. It also implies that changes in anchor choices by a small number of countries can have large and rapid effects on the international monetary system. Other factors found to be related to anchor choice include the symmetry of output shocks and the currency denomination of liabilities.

Suggested Citation

  • Nienke Oomes & Christopher M. Meissner, 2008. "Why Do Countries Peg the Way They Peg? The Determinants of Anchor Currency Choice," IMF Working Papers 2008/132, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2008/132
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    Keywords

    WP; anchor currency choice; U.S. dollar; network externality; dollar anchor; currency denomination;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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