Exchange Rate Volatility Under Peg: Do Trade Patterns Matter?

March 1, 2012

Preview Citation

Format: Chicago

Constant A Lonkeng Ngouana. Exchange Rate Volatility Under Peg: Do Trade Patterns Matter?, (USA: International Monetary Fund, 2012) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper assesses the role of trade patterns in shaping the volatility of the effective exchange rate under two alternative peg regimes: a hard peg to a single currency and a peg to a basket of currencies. I link the changes in the nominal effective exchange rate of a pegged currency to the fluctuations of its anchor vis-a-vis other major currencies, with an emphasis on the dynamics of trade patterns. In an application to the WAEMU (West African Economic and Monetary Union), I find that the nominal effective exchange rate of the union was twice as volatile under the hard peg to the euro as it would have been under a hypothetical basket peg over the past decade. This result was driven by the substantial shifts that occurred in WAEMU trade patterns, away from euro area countries and toward the ?"BICs" (Brazil, India, and China). These findings suggest that policymakers should pay as much attention to the type of peg as to pegging in itself, with a particular focus on the dynamics of trade patterns.

Subject: Conventional peg, Currencies, Exchange rates, Foreign exchange, International trade, Money, Nominal effective exchange rate, Trade balance

Keywords: Anchor currency vis-à-vis, Basket peg, Conventional peg, Currencies, Currency, Currency composition, Exchange rate, Exchange rate volatility, Exchange rates, Global, Hard peg, Nominal effective exchange rate, SDR peg, Southeast Asia, Trade, Trade balance, Trade pattern, Trade patterns, Trade share, WAEMU, WAEMU export, West Africa, WP

Publication Details

Pages:

21
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/073
Stock No:

WPIEA2012073
ISBN:

9781475502251
ISSN:

1018-5941

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