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Dynamic Shift to a Basket-Peg or Floating Regime in East Asian Countries in Response to the People's Republic of China's Transition to a New Exchange Rate Regime

Naoyuki Yoshino (), Sahoko Kaji and Tamon Asonuma ()
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Sahoko Kaji: Asian Development Bank Institute

No 514, ADBI Working Papers from Asian Development Bank Institute

Abstract: This paper analyzes a desirable transition path for East Asian countries given the People's Republic of China's (PRC's) transition to a new exchange rate regime. It attempts to answer two main questions: (i) Would these countries be better off shifting to either a basket peg or a floating regime following the PRC's transition to a basket peg regime? (ii) How and when should these countries shift to the desired regime? The paper captures the influence of the PRC's predetermined shift in its exchange rate regime on East Asian countries' decisions regarding their optimal transition policies based on a dynamic stochastic general equilibrium (DSGE) model of a small open economy. Our calibration exercise using Malaysian and Singapore data from the first quarter (Q1) of 2000 to Q4 2012 reveals that a gradual adjustment to a basket peg is the most desirable policy for both countries. A sudden shift to a basket peg is superior to maintaining a dollar peg in Malaysia, but not in Singapore. Finally, a sudden shift to a floating regime is even worse than maintaining a dollar peg in both countries.

Keywords: basket peg; floating regime; exchange rate transition; peoples republic of china; monetary policy (search for similar items in EconPapers)
JEL-codes: F33 F41 F42 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2015-02-17
New Economics Papers: this item is included in nep-cba, nep-mon, nep-sea and nep-tra
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