External Stability Under Alternative Nominal Exchange Rate Anchors: An Application to the GCC Countries
IMF Working Papers, January 1, 1997
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Bibliographic details
- Authors: Zubair Iqbal, S. Nuri Erbas
- Published: January 1, 1997
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451927900.001
Summary
- Import and export stability is examined under two alternative nominal exchange rate anchors, the U.S. dollar and the SDR.
- Stability under the two pegs depends critically on import and export elasticity with respect to exchange rates.
- The implications of import and export elasticity for an optimal currency basket are also explored.
- The elasticity estimates for the GCC countries suggest that the SDR peg may not outperform the dollar peg in improving external stability.
- Nevertheless, switching to some other nominal exchange rate anchor may improve external stability, a possibility that remains to be explored.
Key findings on elasticities and external stability
- Stability under dollar and SDR pegs is driven by import and export elasticity with respect to exchange rates.
- Elasticity estimates for the GCC countries indicate the SDR peg may not outperform the dollar peg in improving external stability.
- The analysis implies that import and export elasticity magnitudes and signs are central to assessing the performance of nominal exchange rate anchors.
Implications for an optimal currency basket
- The paper explores how import and export elasticity inform the construction of an optimal currency basket.
- Results for the GCC countries suggest that the SDR is not necessarily a superior anchor to the dollar for external stability.
- The possibility remains that an alternative nominal exchange rate anchor (other than the dollar or SDR) could improve external stability; this avenue is identified for further exploration.
Policy-relevant considerations
- Choice of nominal exchange rate anchor should account for country-specific import and export elasticities.
- Policymakers in the GCC region need to weigh the relative stability implications of a dollar peg versus an SDR peg given estimated elasticities.
- Further analysis is necessary to identify whether other nominal anchors or baskets could yield better external stability outcomes.