Why Do Countries Peg the Way They Peg? The Determinants of Anchor Currency Choice
IMF Working Papers, May 1, 2008
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Bibliographic details
- Authors: Nienke Oomes, Christopher M. Meissner
- Published: May 1, 2008
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451869910.001
Summary
- Research question: What determines the currency to which countries peg or "anchor" their exchange rate?
- Data and period: Data for over 100 countries between 1980 and 1998.
- Central finding: Trade network externalities are a key determinant of anchor currency choice.
- Additional findings: Anchor choice is related to the symmetry of output shocks and the currency denomination of liabilities.
- Implication: Anchor currency choice may be suboptimal; certain currencies, e.g., the U.S. dollar, could be oversubscribed.
- Systemic implication: Changes in anchor choices by a small number of countries can have large and rapid effects on the international monetary system.
Key Findings and Evidence
- Trade network externalities emerge as a primary determinant of anchor currency choice based on analysis of more than 100 countries during 1980–1998.
- The symmetry of output shocks affects anchor choice.
- The currency denomination of liabilities influences anchor choice.
- The U.S. dollar is identified as an example of a potentially oversubscribed anchor currency due to network effects.
Policy Implications and Interpretations
- Suboptimal anchor selection: Network externalities can lead to concentrated use of particular anchor currencies even when not welfare-maximizing for all countries.
- Fragility and contagion potential: A small group of countries switching anchors can quickly alter the international monetary system, suggesting potential for rapid propagation of exchange-rate regime changes.
- Consideration for liabilities and shock symmetry: Policymakers should account for the composition of liabilities and the correlation of output shocks when choosing anchors.