Title

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

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

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Full-text Version

Publisher’s Version

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