An Optimal Exchange Rate Peg in a World of General Floating

Stabilization Policies in Open Economies

“…Branson and Katseli-Papaefstratiou (1980), Flanders and Helpman (1979), and Lipschitz and Sundararajan (1980) have investigated alternative weighting schemes for the baskets. Branson and Katseli-papaefstratiou, for example, show how weights based on market power in import and export markets can minimize the effects of exchange rate fluctuations on the terms of trade.…”

China’s New Exchange Rate Regime, Optimal Basket Currency and Currency Diversification

“…One comprises the trade models that use static and partial equilibrium analyses to determine the optimal shares of constituent currencies in the basket. The currency weights are typically proportionate to the respective trade shares with respect to the country whose currency is used as the numeraire (Flanders and Helpman, 1979;Flanders and Tishler, 1981;Katseli-Papaefstratiou, 1981, 1982;Sundararajan, 1980, 1982;Connolly, 1982;Connolly and Yousef, 1982;Bhandari, 1985;Vardal, 1987, 1990;Shi and Xu, 2008). The second branch analyzes the optimal currency basket in a general equilibrium framework.…”

Choosing the Correct Currency Anchor for a Small Economy: The Case of Nepal

“…Studies by Bhandari (1985a and1985b), Flanders and Helpman (1979), Turnovsky (1982), Flanders and Tishler (1981), and Lipschitz and Sundararajan (1980) focused on an optimal basket based on ad hoc criteria such as minimizing the variance in the balance of payments, and found that trade weighted baskets are the optimal policy choice. Those solutions assumed that a basket is the optimal solution and, since most countries trade with more than one country, the optimal basket under those criteria includes the currencies of all trading partners.…”