Dynamic Effects of Changes in the Exchange Rate System

Asian Development Review 33:1, 2016

51 Pages Posted: 9 Apr 2016

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: April 4, 2016

Abstract

We propose a new dynamic transition analysis on the basis of a small open economy dynamic stochastic general equilibrium model. Our proposed analysis differs from existing static and conventional dynamic analyses in that shifts from a fixed exchange rate regime to a basket peg or a floating regime are explicitly explored. We apply quantitative analysis, using data from the People’s Republic of China and Thailand, and find that both economies would be better off shifting from a dollar peg to a basket peg or a floating regime over the long run. Furthermore, the longer the transition period, the greater the benefits of shifting to a basket peg regime from a dollar peg regime owing to limited volatility in interest rates. Regarding sudden shifts to a desired regime, the welfare gains are larger under a shift to a basket peg if the exchange rate fluctuates significantly.

Keywords: basket peg, dynamic transition analysis, East Asia, exchange rate regime, transition path

JEL Classification: F33, F41, F42

Suggested Citation

Yoshino, Naoyuki and Kaji, Sahoko and Asonuma, Tamon, Dynamic Effects of Changes in the Exchange Rate System (April 4, 2016). Asian Development Review 33:1, 2016. Available at SSRN: https://ssrn.com/abstract=2759546

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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