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Stabilization of Effective Exchange Rates Under Common Currency Basket Systems

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  • Eiji Ogawa
  • Junko Shimizu

Abstract

We investigate the extent to which a common currency basket peg would stabilize effective exchange rates of East Asian currencies. We use an AMU (Asian Monetary Unit), which is a weighted average of ASEAN10 plus 3 (Japan, China, and Korea) currencies, as a common currency basket to investigate the stabilization effects. We compare our results with another result on stabilization effects of the common G3 currency (the US dollar, the Japanese yen, and the euro) basket in the East Asian countries (Williamson (2005)). We obtained the following results: first, the AMU peg system would be more effective in reducing fluctuations of the effective exchange rates as more countries applied the AMU peg system in East Asia. Second, the AMU peg system would more effectively stabilize the effective exchange rates than a common G-3 currency basket peg system for four (Indonesia, the Philippines, South Korea and Thailand) of the seven countries. The results suggest that the AMU basket peg would be useful for the East Asian countries whose trade weights on Japan are relatively higher than others.

Suggested Citation

  • Eiji Ogawa & Junko Shimizu, 2006. "Stabilization of Effective Exchange Rates Under Common Currency Basket Systems," NBER Working Papers 12198, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12198
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    References listed on IDEAS

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    1. Andrew K. Rose, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," NBER Working Papers 7432, National Bureau of Economic Research, Inc.
    2. John Williamson, 2005. "A Currency Basket for East Asia, Not Just China," Policy Briefs PB05-01, Peterson Institute for International Economics.
    3. Jeffrey A. Frankel, 1999. "No Single Currency Regime is Right for All Countries or At All Times," NBER Working Papers 7338, National Bureau of Economic Research, Inc.
    4. Kawai, Masahiro & Akiyama, Shigeru, 2000. "Implications of the currency crisis for exchange rate arrangements in emerging East Asia," Policy Research Working Paper Series 2502, The World Bank.
    5. Ogawa, Eiji & Ito, Takatoshi, 2002. "On the Desirability of a Regional Basket Currency Arrangement," Journal of the Japanese and International Economies, Elsevier, vol. 16(3), pages 317-334, September.
    6. Kentaro Kawasaki & Eiji Ogawa, 2006. "What Should the Weights of the Three Major Currencies be in a Common Currency Basket in East Asia? ," Asian Economic Journal, East Asian Economic Association, vol. 20(1), pages 75-94, March.
    7. J.S. Eades, 2005. "East Asia," Chapters,in: A Handbook of Economic Anthropology, chapter 34 Edward Elgar Publishing.
    8. Kawai, Masahiro & Takagi, Shinji, 2000. "Proposed strategy for a regional exchange rate arrangement in post-crisis East Asia," Policy Research Working Paper Series 2503, The World Bank.
    9. Takatoshi Ito & Anne O. Krueger, 1994. "Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, NBER-EASE Volume 3," NBER Books, National Bureau of Economic Research, Inc, number ito_94-1, June.
    10. 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.
    11. 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.
    12. Ramikishen Rajan, 2002. "Exchange Rate Policy Options for Post-crisis Southeast Asia: Is There a Case for Currency Baskets?," The World Economy, Wiley Blackwell, vol. 25(1), pages 137-163, January.
    13. Eiji Ogawa & Junko Shimizu, 2006. "AMU Deviation Indicator for Coordinated Exchange Rate Policies in East Asia and its Relation with Effective Exchange Rates," Discussion papers 06002, Research Institute of Economy, Trade and Industry (RIETI).
    14. Eiji Ogawa & Michiru Sakane, 2006. "The Chinese Yuan after the Chinese Exchange Rate System Reform," Discussion papers 06019, Research Institute of Economy, Trade and Industry (RIETI).
    15. Eiji Ogawa & Junko Shimizu, 2006. "AMU Deviation Indicator for Coordinated Exchange Rate Policies in East Asia and its Relation with Effective Exchange Rates," Hi-Stat Discussion Paper Series d05-131, Institute of Economic Research, Hitotsubashi University.
    16. Eiji Ogawa & Michiru Sakane, 2006. "Chinese Yuan after Chinese Exchange Rate System Reform," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 14(6), pages 39-57.
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    Citations

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    Cited by:

    1. Charles Adams & Hwee Chow, 2009. "Asian Currency Baskets: An Answer in Search of a Question?," Open Economies Review, Springer, vol. 20(3), pages 403-423, July.
    2. Benjamin Keddad, 2013. "Assessing Asian Exchange Rates Coordination under Regional Currency Basket System," AMSE Working Papers 1345, Aix-Marseille School of Economics, Marseille, France, revised Sep 2013.
    3. Aihua Wang & Faruk Balli & Xiumin Li, 2015. "Possible Best Currency Basket Selection from the Perspective of Real Effective Exchange Rate," Pacific Economic Review, Wiley Blackwell, vol. 20(4), pages 635-650, October.
    4. Jo-Hui Chen & Yen-Po Fang, 2011. "A study on the modified components of Asian Currency Unit: an application of the Artificial Neural Network," Quality & Quantity: International Journal of Methodology, Springer, vol. 45(2), pages 329-347, February.
    5. Shingo Watanabe & Masanobu Ogura, 2006. "How Far Apart Are Two ACUs from Each Other? : Asian Currency Unit and Asian Currency Union," Bank of Japan Working Paper Series 06-E-20, Bank of Japan.
    6. Naoyuki Yoshino & Sahoko Kaji & Tamon Asonuma, 2016. "Dynamic Effects of Changes in the Exchange Rate System," Asian Development Review, MIT Press, vol. 33(1), pages 111-161, March.
    7. Benjamin Keddad, 2013. "Exchange rate coordination in Asia under regional currency basket systems," Economics Bulletin, AccessEcon, vol. 33(4), pages 2913-2929.
    8. repec:wsi:serxxx:v:55:y:2010:i:01:n:s0217590810003626 is not listed on IDEAS
    9. OGAWA Eiji & Zhiqian WANG, 2012. "The AMU Deviation Indicators Based on the Purchasing Power Parity and Adjusted by the Balassa-Samuelson Effect," Discussion papers 12078, Research Institute of Economy, Trade and Industry (RIETI).
    10. repec:wsi:ceprxx:v:03:y:2014:i:02:n:s1793969014500095 is not listed on IDEAS
    11. Watanabe, Shingo & Ogura, Masanobu, 2010. "How far apart are the two ACUs from each other? Asian currency unit and Asian currency union," Emerging Markets Review, Elsevier, vol. 11(2), pages 152-172, June.
    12. Eiji Ogawa & Zhiqian Wang, 2012. "The AMU Deviation Indicators Based on the Purchasing Power Parity and Adjusted by the Balassa-Samuelson Effect," Global COE Hi-Stat Discussion Paper Series gd12-255, Institute of Economic Research, Hitotsubashi University.

    More about this item

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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