• Exchange rates and currency

Exchange rates and currency

During the Asian financial crisis, unilateral exchange rate regimes did not cope very well with massive capital inflows. Hard pegs or free floating regimes proved to be either too risky or too rigid. However, given the diversity of trade structures in the region the choice of unilateral basket pegs (UBPs) implies a trade-off between reduced overall volatility and higher volatility against a major currency.

This paper examines regime gains from unilateral and common basket pegs (CBP). Volatility is assessed by computing the conditional variance in logs of first differences using an ARCH-GARCH modelling strategy. Counterfactual analysis shows that a UBP reduces volatility the most and offers the highest regime gains.

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