Optimal currency basket in a world of generalized floating. An application to the Nordic countries

  • Edison H
  • Vårdal E
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Abstract

This paper derives optimal weights for a currency basket taking into consideration the objective of policymakers in the Nordic countries. The analysis is based on the work of Branson and Katseli and Lipschitz and Sundararajan. This paper derives both export share weights by using a simple multi-country model and basket weights by assuming that the objective of the policymakers is to minimize fluctuations in the production of exports. The results show that only under special circumstances are the two weights the same. The basket weights tend to be functions of export weights and other factors such as the covariances of relative prices and exchange rate. Using the formulas derived in the paper, various optimal basket calculations are made for Norway, Finland, and Sweden. © 1987.

Author-supplied keywords

  • Currency baskets
  • Effective exchange rates
  • Exchange rates

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Authors

  • Hali J. Edison

  • Erling Vårdal

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