Working Paper: NBER ID: w12198
Authors: Eiji Ogawa; Junko Shimizu
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.
Keywords: common currency basket; effective exchange rates; East Asian currencies; AMU peg system
JEL Codes: E6; F3; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Number of countries adopting the AMU peg (F36) | Stability of effective exchange rates (F31) |
| AMU peg system (C87) | Stability of effective exchange rates (F31) |
| AMU peg system (C87) | Reduction of fluctuations of effective exchange rates (F31) |
| AMU peg system (for Indonesia, Philippines, South Korea, Thailand) (P00) | Stability of effective exchange rates (F31) |
| AMU peg system (C87) | Better stabilization mechanism than G3 system (E63) |