Choices of Optimal Monetary Policy Instruments Under the Floating and the Basket-Peg Regimes

The Singapore Economic Review, Vol. 57, No. 4, 2012

31 Pages Posted: 26 Jul 2014

See all articles by Naoyuki Yoshino

Naoyuki Yoshino

Asian Development Bank Institute

Sahoko Kaji

Keio University

Tamon Asonuma

International Monetary Fund Research Department

Date Written: December 21, 2012

Abstract

This paper determines whether adopting the basket-peg rather than the floating regime is optimal for emerging market countries. Under the basket-peg regime, there is a trade-off between practical usefulness and welfare losses associated with capital movements across countries. We develop a dynamic stochastic general equilibrium model for small open economies to derive a simple basket weight rule. Although this is suboptimal, we find it practical and easy to implement. With calibration using Singaporean and Thai data for 1997Q3-2006Q2 and comparison among cumulative losses associated with the policy instrument rules, we show that a commitment to the basket weight rule is superior to other instrument rules under the floating regime for small, open emerging market countries like Singapore and Thailand.

Keywords: Basket-peg regime; Monetary Policy Instruments; Small Open Economy; Exchange Rate Regime

JEL Classification: F33; F41

Suggested Citation

Yoshino, Naoyuki and Kaji, Sahoko and Asonuma, Tamon, Choices of Optimal Monetary Policy Instruments Under the Floating and the Basket-Peg Regimes (December 21, 2012). The Singapore Economic Review, Vol. 57, No. 4, 2012. Available at SSRN: https://ssrn.com/abstract=2471269

Naoyuki Yoshino

Asian Development Bank Institute ( email )

Kasumigaseki Building 8F
3-2-5, Kasumigaseki, Chiyoda-ku
Tokyo, 100-6008
Japan

Sahoko Kaji

Keio University ( email )

2-15-45 Mita
Minato-ku
Tokyo, 108-8345
Japan

Tamon Asonuma (Contact Author)

International Monetary Fund Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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