{
  "title": "Why Do Countries Peg the Way They Peg? The Determinants of Anchor Currency Choice",
  "publication": "IMF Working Papers, May 1, 2008",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/why-do-countries-peg-the-way-they-peg-the-determinants-of-anchor-currency-choice-21979",
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  "summary": "What determines the currency to which countries peg or \"anchor\" their exchange rate? Data for over 100 countries between 1980 and 1998 reveal that trade network externalities are a key determinant. This implies that anchor currency choice may well be suboptimal in that certain currencies, e.g.",
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    {
      "heading": "Summary",
      "content": "- Research question: What determines the currency to which countries peg or \"anchor\" their exchange rate?\n- Data and period: Data for over 100 countries between 1980 and 1998.\n- Central finding: Trade network externalities are a key determinant of anchor currency choice.\n- Additional findings: Anchor choice is related to the symmetry of output shocks and the currency denomination of liabilities.\n- Implication: Anchor currency choice may be suboptimal; certain currencies, e.g., the U.S. dollar, could be oversubscribed.\n- Systemic implication: Changes in anchor choices by a small number of countries can have large and rapid effects on the international monetary system."
    },
    {
      "heading": "Key Findings and Evidence",
      "content": "- Trade network externalities emerge as a primary determinant of anchor currency choice based on analysis of more than 100 countries during 1980–1998.\n- The symmetry of output shocks affects anchor choice.\n- The currency denomination of liabilities influences anchor choice.\n- The U.S. dollar is identified as an example of a potentially oversubscribed anchor currency due to network effects."
    },
    {
      "heading": "Policy Implications and Interpretations",
      "content": "- Suboptimal anchor selection: Network externalities can lead to concentrated use of particular anchor currencies even when not welfare-maximizing for all countries.\n- 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.\n- Consideration for liabilities and shock symmetry: Policymakers should account for the composition of liabilities and the correlation of output shocks when choosing anchors.\n\n---\n\n Content in this bundle\n\n- wp08132\n  - wp08132 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp08132 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/why-do-countries-peg-the-way-they-peg-the-determinants-of-anchor-currency-choice-21979"
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    "Authors: Nienke Oomes, Christopher M. Meissner",
    "Published: May 1, 2008",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451869910.001",
    "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.",
    "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.",
    "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.",
    "**_wp08132**"
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