Currency Basket Peg System and Real Exchange Rate Misalignment in East Asia

Abstract

The purpose of this paper is to investigate how the real exchange rate misalignment changed accord-ing to the composition of the currency basket, with an emphasis on the fact that the real exchange rate misalignment as well as stability of the effective exchange rate need to be considered in case of choosing the currency basket in East Asia. I devised the real exchange rate misalignment index and compared the index during the pre-1997 East Asian crisis and post-1997 East Asian crisis. As a result, the real exchange rate misalignment indexes in Korea and Thailand were smaller in cases of assuming that the nominal exchange rates were pegged to the ACU (Asian Currency Unit)basket rather than the G3 (US dollar, Euro, Japanese yen) basket during both periods. However,I got the opposite results in case of Singapore. The countries under the free floating exchange rate systems are probably well matched with the ACU basket peg system, and that the countries under the fixed exchange rate system are probably well matched with the G3 basket peg system.