Stabilization of Effective Exchange Rates Under Common Currency Basket Systems

39 Pages Posted: 25 May 2006 Last revised: 14 Jul 2009

See all articles by Eiji Ogawa

Eiji Ogawa

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

Junko Shimizu

Meikai University

Date Written: May 2006

Abstract

We investigate the extent to which a common currency basket peg would stabilize effective exchange rates of East Asian currencies. We use an AMU (Asian Monetary Unit), which is a weighted average of ASEAN10 plus 3 (Japan, China, and Korea) currencies, as a common currency basket to investigate the stabilization effects. We compare our results with another result on stabilization effects of the common G3 currency (the US dollar, the Japanese yen, and the euro) basket in the East Asian countries (Williamson (2005)). We obtained the following results: first, the AMU peg system would be more effective in reducing fluctuations of the effective exchange rates as more countries applied the AMU peg system in East Asia. Second, the AMU peg system would more effectively stabilize the effective exchange rates than a common G-3 currency basket peg system for four (Indonesia, the Philippines, South Korea and Thailand) of the seven countries. The results suggest that the AMU basket peg would be useful for the East Asian countries whose trade weights on Japan are relatively higher than others.

Suggested Citation

Ogawa, Eiji and Shimizu, Junko, Stabilization of Effective Exchange Rates Under Common Currency Basket Systems (May 2006). NBER Working Paper No. w12198. Available at SSRN: https://ssrn.com/abstract=900984

Eiji Ogawa

Hitotsubashi University ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8601
Japan

Research Institute of Economy, Trade and Industry (RIETI) ( email )

1-3-1 Kasumigaseki
Chiyoda-ku
Tokyo 100-8901
Japan

Junko Shimizu

Meikai University ( email )

Urayasu, Chiba 279-8550
Japan

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