On the Desirability of a Regional Basket Currency Arrangement

44 Pages Posted: 13 Nov 2000 Last revised: 25 Jun 2001

See all articles by Eiji Ogawa

Eiji Ogawa

Hitotsubashi University; Research Institute of Economy, Trade and Industry (RIETI)

Takatoshi Ito

University of Tokyo - Faculty of Economics; National Bureau of Economic Research (NBER); Ministry of Finance, Tokyo

Date Written: November 2000

Abstract

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.

Suggested Citation

Ogawa, Eiji and Ito, Takatoshi, On the Desirability of a Regional Basket Currency Arrangement (November 2000). NBER Working Paper No. w8002. Available at SSRN: https://ssrn.com/abstract=249506

Eiji Ogawa (Contact Author)

Hitotsubashi University ( email )

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Takatoshi Ito

University of Tokyo - Faculty of Economics ( email )

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