An Optimal Currency Basket to Minimize Output and Inflation Volatility: Theory and an Application to Hong Kong

22 Pages Posted: 20 Feb 2014

See all articles by Zihui Ma

Zihui Ma

Huarong Securities Company Limited

Leonard K.H. Cheng

Hong Kong University of Science & Technology (HKUST) - Department of Economics

Date Written: February 2014

Abstract

In this paper we develop a theoretical model of an optimal currency basket for a small open economy. A currency basket for the home economy is defined as a chosen weighted average of a subset of foreign currencies, and an optimal currency basket is taken to be one that minimizes a given weighted average of the expected output volatility and expected inflation volatility. This theoretical model is then applied to Hong Kong, which has adopted a currency board system for close to 30 years. We estimate an optimal currency basket for Hong Kong and compare its performance with the existing currency board system as well as with currency baskets whose weights are given by export and import trade shares.

Suggested Citation

Ma, Zihui and Cheng, Leonard K.H., An Optimal Currency Basket to Minimize Output and Inflation Volatility: Theory and an Application to Hong Kong (February 2014). Pacific Economic Review, Vol. 19, Issue 1, pp. 90-111, 2014, Available at SSRN: https://ssrn.com/abstract=2398673 or http://dx.doi.org/10.1111/1468-0106.12053

Zihui Ma (Contact Author)

Huarong Securities Company Limited ( email )

Beijing
China

Leonard K.H. Cheng

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
0
Abstract Views
309
PlumX Metrics