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Stabilization of Effective Exchange Rates Under Common Currency Basket Systems

  • Eiji Ogawa
  • Junko Shimizu
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    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.

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    File URL: http://www.nber.org/papers/w12198.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12198.

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    Date of creation: May 2006
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    Publication status: published as Ogawa, Eiji and Junko Shimizu. "Stabilization of Effective Exchange Rates under Common Currency Basket Systems." Journal of the Japanese and International Economies 20, 4 (December 2006): 590-611.
    Handle: RePEc:nbr:nberwo:12198
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    1. 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.
    2. 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, 03.
    3. 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).
    4. 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, 07.
    5. 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.
    6. Wei, S.J. & Frankel, J.A., 1992. "Yen Bloc or Dollar Bloc: Exchange Rate Policies of the East Asian Economies," Papers 92-08, University of Birmingham - International Financial Group.
    7. 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.
    8. J.S. Eades, 2005. "East Asia," Chapters, in: A Handbook of Economic Anthropology, chapter 34 Edward Elgar.
    9. 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.
    10. 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).
    11. 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.
    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, 01.
    13. Rose, Andrew K, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," CEPR Discussion Papers 2329, C.E.P.R. Discussion Papers.
    14. John Williamson, 2005. "A Currency Basket for East Asia, Not Just China," Policy Briefs PB05-01, Peterson Institute for International Economics.
    15. 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.
    16. 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.
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