## Why Do Countries Peg the Way They Peg? The Determinants of Anchor Currency Choice

_IMF Working Papers, May 1, 2008_

## Source details

**Canonical URL:** [Why Do Countries Peg the Way They Peg? The Determinants of Anchor Currency Choice](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)

## Other formats

- [Markdown version](/en/publications/wp/issues/2016/12/31/why-do-countries-peg-the-way-they-peg-the-determinants-of-anchor-currency-choice-21979/index.md)
- [Structured JSON version](/en/publications/wp/issues/2016/12/31/why-do-countries-peg-the-way-they-peg-the-determinants-of-anchor-currency-choice-21979/index.json)
- [Bundle manifest](/en/publications/wp/issues/2016/12/31/why-do-countries-peg-the-way-they-peg-the-determinants-of-anchor-currency-choice-21979/bundle-manifest.json)

## 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.

---

## Content in this bundle

- **_wp08132**
  - [_wp08132 (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp08132.pdf.md){rel="alternate" type="text/markdown"}
  - [_wp08132 (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp08132.pdf){rel="external" type="application/pdf"}

---

_Source: 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_