Exchange Rate Policy in the Pacific: An Evaluation of Currency Basket Regimes

18 Pages Posted: 25 May 2017

See all articles by Naoyuki Yoshino

Naoyuki Yoshino

Asian Development Bank Institute

Matthias Helble

Asian Development Bank; ADBI; ADBI

Ahmad Danu Prasetyo

Bandung Institute of Technology - School of Business and Management

Date Written: May 2017

Abstract

The Pacific island countries have opted for 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 the paper, we study the basket currency arrangements by Fiji, Samoa, the Solomon Islands, and Tonga. We first build a new four‐country exchange rate model that illustrates how monetary authorities should best determine the weights of the basket currencies given certain macroeconomic objective functions. In this model, we explicitly include tourism flows. In the second part of the paper, we estimate the de facto weights of foreign currencies in the currency basket of the four countries. We show how the composition has changed amid the global financial crisis. Finally, we demonstrate that the current weights are not optimal compared with the predictions of our model.

Suggested Citation

Yoshino, Naoyuki and Helble, Matthias and Prasetyo, Ahmad Danu, Exchange Rate Policy in the Pacific: An Evaluation of Currency Basket Regimes (May 2017). Asian‐Pacific Economic Literature, Vol. 31, Issue 1, pp. 3-20, 2017, Available at SSRN: https://ssrn.com/abstract=2972906 or http://dx.doi.org/10.1111/apel.12174

Naoyuki Yoshino (Contact Author)

Asian Development Bank Institute ( email )

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

Matthias Helble

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

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