Hard Pegs Versus Intermediate Currency Arrangements in the Pacific

35 Pages Posted: 12 May 2015

See all articles by Matthias Helble

Matthias Helble

Asian Development Bank; ADBI; ADBI

Ahmad Danu Prasetyo

Bandung Institute of Technology - School of Business and Management

Naoyuki Yoshino

Asian Development Bank Institute

Date Written: May 12, 2015

Abstract

The 14 Pacific developing member countries (DMCs) of the Asian Development Bank (ADB) have opted for very different exchange rate regimes with varying degrees of flexibility. Whereas several microstates have adopted an external currency as their legal tender, others have decided to use a basket currency and yet others have chosen a managed float. The choice of exchange rate regime can have far reaching economic consequences. In this paper, we first build a simple exchange rate model that illustrates how monetary authorities should best determine the weights of the basket currencies in order to keep fluctuations in gross domestic product (GDP) and in exchange rates to a minimum. We add to the literature by explicitly modeling tourism flows. In the second part of the paper we study the recent developments of the Pacific DMCs in terms of the volatility of their exchange rates, their GDP and their balance of trade. We find that Pacific DMCs with external currencies systematically exhibit lower GDP volatility compared to Pacific DMCs with basket currencies or floats. We conclude that Pacific DMCs with basket currencies or floats seem to have managed their exchange rate with the objective to minimize fluctuations of exchange rates, rather than those of their GDP. Our model therefore provides valuable guidance for those monetary authorities in the Pacific that would like to lower GDP fluctuations.

Keywords: exchange rate policy, economic integration, economic development, microstates

JEL Classification: F31, F33

Suggested Citation

Helble, Matthias and Prasetyo, Ahmad Danu and Yoshino, Naoyuki, Hard Pegs Versus Intermediate Currency Arrangements in the Pacific (May 12, 2015). ADBI Working Paper 524, Available at SSRN: https://ssrn.com/abstract=2605414 or http://dx.doi.org/10.2139/ssrn.2605414

Matthias Helble (Contact Author)

Asian Development Bank ( email )

Philippines
006326831120 (Phone)

ADBI ( email )

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

ADBI ( email )

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

Ahmad Danu Prasetyo

Bandung Institute of Technology - School of Business and Management ( email )

10 Ganesha Street
Gedung SBM-ITB
Bandung, West Java 40132
Indonesia

Naoyuki Yoshino

Asian Development Bank Institute ( email )

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

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