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

 
Author/Editor: Yelten, Sibel
 
Publication Date: August 01, 2004
 
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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 uses the Sjaastad model to estimate the optimal currency area for the Nepalese rupee and concludes that, currently, Nepal may be reasonably well off with its peg to the Indian rupee. As its economy opens and its trade base and trading partners expand, it may want to reevaluate whether moving toward an exchange rate basket including the U.S. dollar may be a better policy choice. The regression results indicate that, currently, the prices of imported goods in Nepal are solely influenced by India, suggesting that with the peg to the Indian rupee, Nepal can isolate the import side of its economy completely from external shocks. On the export side, the regression results indicate that Nepalese export prices seem, to a large extent, to be influenced by U.S. prices. However, the export price index had to be constructed, and the construction methodology is likely to entail an overestimation of the impact of the U.S. dollar.
 
Series: Working Paper No. 04/142
Subject(s): Monetary unions | Nepal | Asia | Financial crisis | Exchange rates | Currencies | Currency pegs | Economic models

Author's Keyword(s): Optimum Currency Area | Asian Crises | Exchange Rate Basket | Currency Peg
 
English
Publication Date: August 01, 2004
ISBN/ISSN: 1934-7073 Format: Paper
Stock No: WPIEA1422004 Pages: 15
Price:
US$15.00 (Academic Rate:
US$15.00 )
 
 
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