An optimal currency basket to minimize output and inflation volatility : theory and an application to Hong Kong
Document Type
Journal article
Source Publication
Pacific Economic Review
Publication Date
2-1-2014
Volume
19
Issue
1
First Page
90
Last Page
111
Publisher
Wiley-Blackwell Publishing Asia
Abstract
In this paper we develop a theoretical model of an optimal currency basket for a small open economy. A currency basket for the home economy is defined as a chosen weighted average of a subset of foreign currencies, and an optimal currency basket is taken to be one that minimizes a given weighted average of the expected output volatility and expected inflation volatility. This theoretical model is then applied to Hong Kong, which has adopted a currency board system for close to 30 years. We estimate an optimal currency basket for Hong Kong and compare its performance with the existing currency board system as well as with currency baskets whose weights are given by export and import trade shares.
DOI
10.1111/1468-0106.12053
Print ISSN
1361374X
E-ISSN
14680106
Publisher Statement
Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
Recommended Citation
Ma, Z., & Cheng, L. K. (2014). An optimal currency basket to minimize output and inflation volatility: Theory and an application to Hong Kong. Pacific Economic Review, 19(1), 90-111. doi: 10.1111/1468-0106.12053