On the Desirability of a Regional Basket Currency Arrangement
This paper considers a theoretical model to examine an optimal exchange rate regime for (Asian) emerging market economies that export goods to the U.S., Japan, and neighboring countries. The optimality of the exchange rate regime is defined as minimizing the fluctuation of trade balances, in the environment where the yen-dollar exchange rate fluctuates. Since the de facto dollar peg regime is blamed as one of the factors that caused the Asian currency crisis, the question of the optimal exchange rate regime is quite relevant in Asia. The novelty of this paper is to show how an emerging market economy's choice of the exchange rate regime (or weights in the basket) is dependent on the neighboring country's. The dollar weights in the currency baskets of the two countries are determined as a Nash equilibrium. In general, there are multiple equilibria, and a coordination failure' may result.
|Date of creation:||Nov 2000|
|Date of revision:|
|Publication status:||published as Ogawa, Eiji and Takatoshi Ito. "On The Desirability Of A Regional Basket Currency Arrangement," Journal of the Japanese and International Economies, 2002, v16(3,Sep), 317-334.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- 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.
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Pacific Basin Working Paper Series
93-01, Federal Reserve Bank of San Francisco.
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- 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.
- June Flanders, M. & Tishler, Asher, 1981. "The role of elasticity optimism in choosing an optimal currency basket with applications to Israel," Journal of International Economics, Elsevier, vol. 11(3), pages 395-406, August.
- M. June Flanders & Elhanan Helpman, 1979. "An Optimal Exchange Rate Peg in a World of General Floating," Review of Economic Studies, Oxford University Press, vol. 46(3), pages 533-542.
- Benassy-Quere, Agnes, 1999. "Optimal Pegs for East Asian Currencies," Journal of the Japanese and International Economies, Elsevier, vol. 13(1), pages 44-60, March.
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