Dynamic Shift to a Basket-Peg or Floating Regime in East Asian Countries in Response to the People's Republic of China's Transition to a New Exchange Rate Regime

40 Pages Posted: 17 Feb 2015

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: February 17, 2015

Abstract

This paper analyzes a desirable transition path for East Asian countries given the People's Republic of China's (PRC's) transition to a new exchange rate regime. It attempts to answer two main questions: (i) Would these countries be better off shifting to either a basket peg or a floating regime following the PRC's transition to a basket peg regime? (ii) How and when should these countries shift to the desired regime? The paper captures the influence of the PRC's predetermined shift in its exchange rate regime on East Asian countries' decisions regarding their optimal transition policies based on a dynamic stochastic general equilibrium (DSGE) model of a small open economy. Our calibration exercise using Malaysian and Singapore data from the first quarter (Q1) of 2000 to Q4 2012 reveals that a gradual adjustment to a basket peg is the most desirable policy for both countries. A sudden shift to a basket peg is superior to maintaining a dollar peg in Malaysia, but not in Singapore. Finally, a sudden shift to a floating regime is even worse than maintaining a dollar peg in both countries.

Keywords: basket peg, floating regime, exchange rate transition, People's Republic of China, monetary policy

JEL Classification: F33, F41, F42

Suggested Citation

Yoshino, Naoyuki and Kaji, Sahoko and Asonuma, Tamon, Dynamic Shift to a Basket-Peg or Floating Regime in East Asian Countries in Response to the People's Republic of China's Transition to a New Exchange Rate Regime (February 17, 2015). ADBI Working Paper 514. Available at SSRN: https://ssrn.com/abstract=2566132 or http://dx.doi.org/10.2139/ssrn.2566132

Naoyuki Yoshino (Contact Author)

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

International Monetary Fund Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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