- GDP-weighted currency basket,
- basket link/peg,
- monetary union,
- trade creation,
- currency integration,
- de facto,
- john Williamson,
- A Rose
This chapter supports Williamson(1996)’s proposal for a common anchor for East Asian currencies, and recommends a simple basket based on a basket of major currencies, including the US dollar, the Euro, the Japanese Yen, the British pound, the Canadian dollar, and the Australian dollar, each weighted by GDP two years ago. It is demonstrated that pegging with this currency basket effectively stabilizes a country’s effective exchange rate, and that with a common anchor, de facto currency integration is achieved. Each currency, on transition, can appreciate to depreciate to achieve an effective exchange rate consistent with its economic fundamentals and then keep pegging to the common anchor at such a level until economic fundamentals so change as to warrant a repegging against the common anchor.
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