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Dynamic Effect of Change in Exchange Rate System -From the Fixed Exchange Rate Regime to the Basket-peg or Floating Regime

  • Naoyuki Yoshino

    (Department of Economics, Keio University)

  • Sahoko Kaji

    (Department of Economics, Keio University)

  • Tamon Asonuma

    (International Monetary Fund)

We quantify dynamic effect of shifts of exchange rate system from the dollar-peg to the basket- peg or floating and obtain transition paths for the shifts, based on a dynamic small open-economy model. We find that a small open country will be better off shifting to the basket-peg or floating regime than maintaining the dollar-peg regime with capital control, in the long-run. Furthermore, because of welfare costs associated with volatility in nominal interest rates, the longer the transition period, the more benefits a country gains from shifting suddenly to the basket-peg from the dollar- peg regime rather than proceeding gradually. Thidly, focusing on sudden shifts to desired regimes, welfare gain of the country is higher under a shift to the basket-peg if the exchagne rate fluctuates remarkably. Lastly, concerning with shifting to the managed floating, it is less attractive to adopt compared with shifting to the basket-peg as intervening to maintain the exchange rate for certain periods leads to higher losses as the authority lacks monetary policy autonomy..

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File URL: http://ies.keio.ac.jp/old_project/old/gcoe-econbus/pdf/dp/DP2011-026.pdf
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Paper provided by Keio/Kyoto Joint Global COE Program in its series Keio/Kyoto Joint Global COE Discussion Paper Series with number 2011-026.

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Length: 38 pages
Date of creation: Aug 2011
Date of revision:
Handle: RePEc:kei:dpaper:2011-026
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  1. Naoyuki Yoshino & Sahoko Kaji & Tamon Asonuma, 2012. "Choices Of Optimal Monetary Policy Instruments Under The Floating And The Basket-Peg Regimes," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 57(04), pages 1250024-1-1.
  2. ChangJin Kim & Jong-Wha Lee, 2008. "Exchange Rate Regime And Monetary Policy Independence In East Asia," Pacific Economic Review, Wiley Blackwell, vol. 13(2), pages 155-170, 05.
  3. Takatoshi Ito & Eiji Ogawa & Yuri Nagataki Sasaki, 1999. "How Did the Dollar Peg Fail in Asia?," NBER Working Papers 6729, National Bureau of Economic Research, Inc.
  4. Shioji, Etsuro, 2006. "Invoicing currency and the optimal basket peg for East Asia: Analysis using a new open economy macroeconomic model," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 569-589, December.
  5. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  6. Yin-Wong Cheung & Menzie D. Chinn & Eiji Fujii, 2007. "The Overvaluation of Renminbi Undervaluation," NBER Working Papers 12850, National Bureau of Economic Research, Inc.
  7. Eiji Ogawa & Takatoshi Ito, 2000. "On the Desirability of a Regional Basket Currency Arrangement," NBER Working Papers 8002, National Bureau of Economic Research, Inc.
  8. Warwick J McKibbin & Will Martin, 1998. "The East Asian Crisis: Investigating Causes and Policy Responses," Departmental Working Papers 1998-06, The Australian National University, Arndt-Corden Department of Economics.
  9. Naoyuki Yoshino & Sahoko Kaji & Yoko Ibuka, 2003. "The Stabilization of an Open Economy with Capital Controls: An Analysis Using Malaysian Data," Asian Economic Papers, MIT Press, vol. 2(3), pages 63-83.
  10. Yoshino, Naoyuki & Kaji, Sahoko & Suzuki, Ayako, 2004. "The basket-peg, dollar-peg, and floating: A comparative analysis," Journal of the Japanese and International Economies, Elsevier, vol. 18(2), pages 183-217, June.
  11. Graham Bird & Ramkishen Rajan, 2002. "Optimal currency baskets and the third currency phenomenon: exchange rate policy in Southeast Asia," Journal of International Development, John Wiley & Sons, Ltd., vol. 14(8), pages 1053-1073.
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