the role of nominal anchor currencies in exchange rate arrangements
TRANSCRIPT
JOURNAL OF THE JAPANESE AND INTERNATIONAL ECONOMIES 12, 334–387 (1998)ARTICLE NO. JJ980419
The Role of Nominal Anchor Currencies in ExchangeRate Arrangements
Masahiro Kawai*,† and Shigeru Akiyama†
*World Bank, 1818 H Street, N.W., Washington, DC 20433; and †Institute of Social Science,University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113, Japan
Received July 8, 1998; revised October 14, 1998
Kawai, Masahiro, and Akiyama, Shigeru—The Role of Nominal Anchor Currenciesin Exchange Rate Arrangements
This paper studies the evolution of exchange rate arrangements of almost allcountries in the world over the period 1970–1996. It examines both officially reportedand empirically observed exchange rate arrangements. Several findings are obtained.First, the relative economic size of countries under fixed exchange rate regimes hasnot declined as dramatically as the measure based on reported arrangements wouldindicate. Second, the U.S. dollar has been the most dominant, global anchor currencybecause many developing economies, particularly those in Asia, Latin America,and the Middle East, have attempted to stabilize their exchange rates to the dollar.Third, the reserve currency composition is determined by the constructed measureof the net currency-area size in addition to the own-economic size of the reservecurrency country. Fourth, as a result of the transition to the final stage of EMU,the euro is expected to emerge as the world’s second most dominant anchor currency.While the Japanese yen will continue to play a less significant role as nominalanchor, its role in East Asia is expected to rise gradually. J. Japan. Int. Econ.December 1998, 12(4), pp. 334–387. World Bank, 1818 H Street, N.W., Washington,DC 20433 and Institute of Social Science, University of Tokyo, 7-3-1 Hongo,Bunkyo-ku, Tokyo 113, Japan. 1998 Academic Press
Journal of Economic Literature Classification Numbers F31, F33, F36.
This is a revised version of the paper presented to the NBER–TCER–CEPR TrilateralConference ‘‘International Monetary Regime in the 21st Century’’ held in Tokyo on December19–20, 1997. The authors are grateful to James Boughton, Peter Clark, and Peter Quirk foruseful conversations at the initial stage of this research and to Barry Eichengreen, TakatoshiIto, Eiji Ogawa, Shinji Takagi, Kazuo Yokokawa, and other conference participants forcomments on earlier versions of the paper. The views expressed in the paper do not representthose of the World Bank.
3340889-1583/98 $25.00Copyright 1998 by Academic PressAll rights of reproduction in any form reserved.
EXCHANGE RATE ARRANGEMENTS 335
I. INTRODUCTION
This paper examines the evolution of exchange rate arrangements ofalmost all countries in the world since the end of the Bretton Woods fixedparity system. The paper focuses particularly on the role played by theworld’s major currencies, such as the U.S. dollar, the deutsche mark, andthe Japanese yen, as nominal anchors for other countries’ exchange rate sta-bilization.
Until August 1971, when President Richard Nixon suspended the officialconvertibility of the U.S. dollar to gold, exchange rate fluctuations of manyInternational Monetary Fund (IMF) member countries had been limitedwithin a narrow margin (61%) around par values set in terms of gold orthe U.S. dollar. Soon after the Nixon shock, the industrialized world’s fixedexchange rate regime began to unravel. In the spring of 1973, the EuropeanCommunity countries severed the link between their currencies and theU.S. dollar, Japan decided not to support the Smithsonian central rate, andthe international monetary system entered a new era called the ‘‘generalizedfloating’’ system. To avoid greater exchange rate volatility, a large numberof developing countries maintained a fixed rate regime by stabilizing theirexchange rates to the major industrialized countries’ currencies, and severalWestern European countries continued to limit their exchange rate move-ments within narrow margins. The latter included the formation of the‘‘snake’’ by Belgium, France, Germany, Italy, Luxembourg, and the Nether-lands in April 1972,1 which eventually led to the establishment of theEuropean Monetary System in 1979.
Even under generalized floating, the currencies of the major industrial-ized countries continue to play a significant role as nominal anchors towhich other countries stabilize their exchange rates. In the Bretton Woodsera, the U.S. dollar and the UK pound were dominant anchor currencies.In more recent years, it is sometimes claimed that the deutsche mark and,to a limited extent, the Japanese yen have risen to nominal anchor currencystatus. This claim supports the view that a multipolar international monetarysystem is emerging, centered on the economic might of the largest countriesand entities of the world, that is, the United States, the European Union,and Japan.
Studies on currency blocs by Frankel and Wei (1993, 1994, 1995) exam-ined the roles of the U.S. dollar, the deutsche mark, and the Japaneseyen as potential nominal anchor currencies by using a selected sample of
1 England (and Ireland, which pegged its currency to the UK pound) and Denmark joinedthe snake in May 1972. Norway and Sweden also joined as associate members. Among thesecountries, only Belgium, Denmark, Germany, Luxembourg, the Netherlands, and Norwaywere stable members of the snake.
336 KAWAI AND AKIYAMA
countries. They found that while the U.S. dollar and the deutsche markare dominant nominal anchor currencies in their respective regions, i.e.,the Western Hemisphere and Western Europe, the Japanese yen is notdominant in Asia. Instead, the U.S. dollar is the dominant nominal anchor inAsia. Extending the scope of the Frankel–Wei studies, this paper examinesexchange rate arrangements for almost all countries in the world. As poten-tial nominal anchors, we focus on the currencies of five major industrializedcountries, two important currency baskets, and the currencies of potentiallyrelevant minor countries to present a comprehensive picture of the changingrole of the major and minor currencies in shaping the international mone-tary system.
The paper is organized as follows. Section II offers rich informationon exchange rate arrangements from three different perspectives. First, itreviews the evolution of ‘‘reported’’ exchange rate arrangements of IMFmember countries. Second, it examines patterns of exchange rate volatilitymeasured in terms of potential nominal anchor currencies. A currency isjudged to be a good candidate as a nominal anchor if any given country’sexchange rate vis-a-vis this particular currency exhibits the smallest volatil-ity and if the magnitude of volatility itself is small and close to zero. Third,it presents a regression analysis of the Frankel and Wei type to measurethe relative weights of nominal anchor currencies in the country’s exchangerate management. Section III discusses how exchange rate arrangementshave evolved in each region of the world since the beginning of the 1970sbased on information provided in Section II. It reports that the actualexchange rate policies adopted in different regions have distinct characteris-tics in terms of the size of exchange rate volatility and the choice of nominalanchor currencies. Section IV conducts several exercises making use ofinformation obtained in Section II. First, it calculates the economic sizesof countries under fixed and flexible exchange rate regimes using the esti-mated, conditional volatility of exchange rate movements and comparesthese results with those that would be obtained from information on re-ported arrangements. Next, it calculates the economic sizes of currencyareas formed by each of the G-5 industrialized countries (i.e., the UnitedStates, Germany, France, the United Kingdom, and Japan), the SpecialDrawing Rights (SDR), and the European Currency Unit (ECU), usingthe estimated weights of nominal anchor currencies. Finally, it calculatesthe economic sizes of currency areas that would be formed by the prospec-tive euro, the U.S. dollar, and the Japanese yen under alternative assump-tions of possible Economic and Monetary Union (EMU) membership. InSection V, we examine econometrically whether the shares of the G-5currencies held by the world’s central banks as foreign exchange reservescan be better explained by our estimated measures of currency areas in
EXCHANGE RATE ARRANGEMENTS 337
addition to the traditionally used variable, i.e., the own-economic size of therespective reserve-currency country. Section VI offers concluding remarks.
II. REPORTED AND OBSERVED EXCHANGE RATEARRANGEMENTS
1. Reported Exchange Rate Arrangements
The IMF regularly publishes exchange rate arrangements reported by itsmember countries according to its classification scheme. Table I summarizeschanges in exchange rate arrangements, as classified by the IMF, in termsof the number of countries.2
Exchange rate arrangements are currently classified broadly into threecategories, i.e., (a) a fixed rate arrangement, (b) limited exchange rateflexibility, and (c) a more flexible rate arrangement. First, the fixed ratearrangement includes a ‘‘peg to a single currency’’ and a ‘‘peg to a basketof currencies.’’ As target currencies for single-currency pegs, the IMF liststhe U.S. dollar, the French franc, the deutsche mark, the Australian dollar,the Indian rupee, the South African rand, the Italian lira, and the Singaporedollar at end-1997. In the past, the list used to include the UK pound,the Spanish peseta, the Portuguese escudo (for their respective formercolonies), and the Russian ruble (for the newly independent, former Sovietrepublics soon after the collapse of the Soviet Union). A peg to a basketof currencies is further divided into a ‘‘peg to the SDR’’ and a ‘‘peg to acurrency composite other than the SDR.’’ While currency compositions ofthe SDR and their weights are clearly defined by the IMF, those of othercurrency composites are specific to the respective country and in mostcases are not made publicly available. To find such information, one muststatistically analyze the observed exchange rate movements and estimatethe basket composition and currency weights.
Second, the classification ‘‘limited exchange rate flexibility’’ includes‘‘flexibility limited in terms of a single currency’’ and ‘‘flexibility limited interms of a group of currencies.’’ The first subcategory (flexibility limitedin terms of a single currency) is in reality a de facto peg to the U.S. dollar.The second subcategory (flexibility limited to a group of currencies) is acooperative exchange rate arrangement maintained under the ExchangeRate Mechanism (ERM) of the European Monetary System (EMS).
2 This classification scheme has been revised several times, reflecting the widespread adop-tion of floating exchange rates. This has resulted in the expansion of the number of arrangementcategories. Due to the changes in IMF classifications, some past arrangements cannot be madecomparable to present-day categories for the columns corresponding to the years 1960, 1970,and 1980.
338 KAWAI AND AKIYAMAT
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EXCHANGE RATE ARRANGEMENTS 339
Finally, the classification ‘‘more flexible rate arrangement’’ includes‘‘other managed floating’’ and ‘‘independently floating.’’3 The subcategoryindependently floating is supposed to represent a textbook-style flexibleexchange rate regime, while this may possibly contain a heavily managed, oreven a de facto fixed, exchange rate regime. Needless to say, the subcategory‘‘managed floating’’ suggests frequent interventions by the authorities inthe foreign exchange market to control exchange rate movements.
In the spring of 1973, many industrialized countries decided to abandonfixed parity obligations of the Smithsonian Agreement, and the era ofgeneralized floating began. Since then, the number of countries on flexiblerate arrangements, specifically those on more flexible rate arrangements,has risen. Table I shows that at most only 3 of 120 countries (2.5% of thetotal) had adopted a flexible rate arrangement at end-1970 but that thenumber of countries on flexible rate arrangements increased gradually toat most 39 of 141 countries (28% of the total) at end-1980, to 53 of 154countries (34%) at end-1990, and further up to 99 countries of 181 (55%)at end-1997.
On the other hand, there are still a large number of countries thatattempt to stabilize exchange rates vis-a-vis a single currency or a basketof currencies. As of December 1997, in addition to 66 countries formallyon fixed rate arrangements, there were countries which have pursued someexchange rate stabilization by adopting limited exchange rate flexibility (16countries) or other managed floating (46 countries). It is also possible thatsome countries on independently floating have managed their exchangerates tightly to stabilize their rates in terms of a certain currency or basketof currencies.
Focusing on the details of fixed rate arrangements, as of December 1997,the U.S. dollar continues to be the most popular target currency (for 20
3 Between July 1975 and June 1982, the IMF category ‘‘floating’’ was defined in a widesense, including three subcategories of independently floating, common margins, and a set ofindicators. The first subcategory, independently floating, included various types of flexiblerate arrangements. The second subcategory, common margins, referred to the cooperativesnake arrangement maintained by a group of European countries (until February 1979) thatled to the ERM under the EMS (since March 1979). This second subcategory was renamedas the ‘‘cooperative exchange arrangement’’ in July 1982. At the time of the July 1982reclassification, the subcategory independently floating was given a narrow definition andbecame part of the newly defined three separate subcategories, i.e., independently floating,flexibility limited in terms of a single currency, and other managed floating. The third subcate-gory, a set of indicators (or ‘‘adjusted according to a set of indicators’’), was abolished in thefirst quarter of 1997. Detailed information for the 1975–1978 period is available only throughthe IMF’s internal documents, while information for the period since October 1978 can beobtained from the IMF, International Financial Statistics, beginning with the December 1979issue. Information on Hong Kong and Taiwan, not available from IMF publications, is obtainedfrom the Japan Committee for Pacific Economic Outlook (1997).
340 KAWAI AND AKIYAMA
countries), followed by non-SDR currency baskets (for 17 countries), theFrench franc (for 15 countries), and the deutsche mark (for 3 countries).4
In addition, there are 16 countries which are on limited exchange rateflexibility, and 4 countries out of these are on flexibility limited in termsof a single currency, which is really a peg to the U.S. dollar. Thus, thenumber of countries de facto pegged to the U.S. dollar is 24. The Frenchfranc is a target for the exchange rate pegs of 15 African countries, 14 ofwhich are CFA Franc Area members. The number of countries peggingtheir rates to the SDR has declined rapidly, and in 1997 only 3 countriesformally pegged their currency to the SDR. It is noteworthy to observethat no country pegs its exchange rate to the Japanese yen.
In 1970, the UK pound was a target for as many as 30 countries. By themid-1980s, however, it had completely lost this position.5 As mentionedearlier, immediately following their independence from the Soviet Union,many former Soviet republics used the Russian ruble as a target currency.By June 1995, however, all had ceased to do so.
The second column of the Appendix table summarizes ‘‘reported’’ ex-change rate arrangements for each individual country for the 1990s. Similarinformation can also be presented for earlier periods.6 The following abbre-viations are used to describe various types of reported exchange rate ar-rangements: USD 5 pegged to the U.S. dollar; DM 5 pegged to thedeutsche mark; FF 5 pegged to the French franc; AD 5 pegged to theAustralian dollar; IL 5 pegged to the Italian lira; IR 5 pegged to theIndian rupee; PE 5 pegged to the Portuguese escudo; RR 5 pegged to
4 Though not shown in Table I, other target currencies for single-currency pegs include theSouth African rand (for 3 countries), the Australian dollar, the Indian rupee, the Italian lira,and the Singapore dollar (for 1 country each).
5 Until the beginning of World War II, the UK pound sterling was used more widely thanthe U.S. dollar as international currency. In the postwar Bretton Woods period the poundsterling functioned as the key currency for the Sterling Area until the latter half of the 1960s.After the devaluation of the pound in 1967, the currency’s importance declined precipitously.See Cohen (1971) and Cairncross and Eichengreen (1983) for a history of the decline of thepound sterling.
6 A complete list of information, including that on exchange rate volatility and regressionresults to be discussed later, is available upon request from the authors (see also the discussionpaper version Kawai and Akiyama [1998]). The Appendix table is compiled mainly from thelist of exchange rate arrangements published in the International Financial Statistics, theAnnual Report on Exchange Arrangements and Exchange Restrictions, the Annual Report,and the IMF’s internal documents. The International Financial Statistics (IFS) began to publisha list of exchange rate arrangements on a monthly basis starting in October 1978. Later itchanged to a quarterly basis starting in March 1987. To find the exact month of a change inexchange rate arrangements, we have tried to supplement this information by using the AnnualReport on Exchange Rate Arrangements and Exchange Restrictions and the IMF’s internaldocuments. Unresolved entries, where they remain, are marked with an asterisk in the Appen-dix table to indicate that information is based on IFS quarterly lists.
EXCHANGE RATE ARRANGEMENTS 341
the Russian ruble; SAR 5 pegged to the South African rand; SID 5 peggedto the Singapore dollar; SDR 5 pegged to the Special Drawing Rights ofthe IMF; CC 5 pegged to other currency composite; LS 5 flexibility limitedvis-a-vis a single currency; CEA 5 cooperative exchange arrangements;AF 5 adjusted according to a set of indicators; MF 5 managed floating;IF 5 independently floating.
Although the table provides useful information as to the nature of ex-change rate arrangements for individual countries, their characteristics arenot discussed in this paper.7
2. Exchange Rate Volatility
The reported exchange rate arrangements provide useful informationabout the nature of the arrangements as reported by the individual coun-tries. However, these reported arrangements do not always describe theactual practice of exchange rate policies, nor do they offer sufficient infor-mation as to which currency or basket of currencies is chosen as a targetfor exchange rate stabilization. To fully understand what exchange ratepolicies are actually pursued, one must statistically examine the behaviorof observed exchange rates.
One way to do this is to calculate exchange rate volatility, as measuredby the standard deviation of monthly rates of change in each country’sexchange rates, and to compare the magnitude of each country’s volatilityvis-a-vis a number of currencies. A currency is a good candidate for anominal anchor if a country’s exchange rate vis-a-vis this particular currencyexhibits the lowest volatility among the currencies studied as potentialanchors. In addition, the magnitude of this volatility must be small andclose to zero.
Our definition of exchange rate volatility is the standard deviation of thefirst difference in natural logarithms of monthly exchange rates vis-a-vis theG-5 currencies, two currency baskets, or other minor, regional currencies,
Det 5 et 2 et21 5 ln(Et) 2 ln(Et21),
where Et is the level of the nominal exchange rate for currency j.The G-5 currencies are the U.S. dollar, the deutsche mark, the French
franc, the UK pound sterling, and the Japanese yen, while two explicit
7 See International Monetary Fund (1997) for discussions of exchange rate arrangementsin developing countries and the appendix in Kawai and Akiyama (1998) for both industrialand developing countries.
342 KAWAI AND AKIYAMA
currency baskets are the SDR and the ECU.8 We also consider relativelyminor, regional currencies depending on a country’s economic as well asnoneconomic (i.e., colonial, historical, cultural, and geographical) relation-ships. Using information from the reported exchange rate arrangements,we include the Australian dollar, the Indian rupee, the New Zealand dollar,the Portuguese escudo, the Singapore dollar, the South African rand, andthe Spanish peseta in the list of potential nominal anchor currencies for acertain set of countries.9
We use monthly average exchange rates (IFS line code rf) for the sampleperiod of January 1970 through December 1996.10 We divide the sampleperiod into six subperiods, each of 5-year duration except for the last, thatis, January 1970–December 1974, January 1975–December 1979, January1980–December 1984, January 1985–December 1989, January 1990–December 1994, and January 1995–December 1996. The last period ofJanuary 1995 through December 1996 is combined with the preceding5-year period to construct an additional subperiod of 7 years, January1990–December 1996.11
To obtain meaningful estimates of exchange rate volatility, we havedecided to remove data observations with values of log first differencesgreater than 0.1. We have done so because countries often devalue theircurrencies to accommodate persistent differences in inflation rates vis-a-vis their nominal anchor-currency country. Without the effects of such
8 The monthly average series of SDR and ECU exchange rates vis-a-vis the U.S. dollar arealso obtained from the IFS database. However, data for ECU exchange rates are availableonly from January 1978. In order to extend the series into the earlier period, we haveconstructed hypothetical ECU series by using the values of the currencies making up theECU at the time when the ECU was first established in March 1979. To be more precise, wehave calculated the U.S. dollar value of the ECU, as the weighted sum of the U.S. dollarvalues of the ECU currencies’ units, for every month from December 1969 through January1978 and spliced this calculated series to the IFS series of the ECU at January 1978. The ECmember countries used the following fixed amounts of member currencies to construct theECU between March 1979 and September 1984: Belgian franc and Luxembourg franc, 3.80;Danish krone, 0.217; French franc, 1.15; German mark, 0.828; Irish pound, 0.00759; Italianlire, 109; Netherlands guilder, 0.286; and UK pound sterling, 0.0085. These countries had usedthe same currency units since 1975 to calculate the European Unit of Account (EUA). TheIFS database appears to report the EUA exchange rate as the ECU rate between January1978 and February 1979, before the formal introduction of the ECU in March 1979, becauseof the identical construction of these two composite currencies.
9 The Russian ruble is not used as a potential nominal anchor currency due to the lack ofa sufficient number of exchange rate data for the former Soviet republic countries.
10 Exchange rate data for Taiwan are obtained from the Central Bank of China, TaiwanDistrict Financial Statistics, various issues.
11 The recent currency and financial crisis in East Asia suggests that the region’s exchangerate movements may have deviated from the earlier patterns observed until mid-1997. Onthis ground, we have decided not to cover the recent crisis period due to a lack of a sufficientlylarge number of data.
EXCHANGE RATE ARRANGEMENTS 343
discrete currency devaluations (or revaluations) being eliminated, calcu-lated volatility would become too large to conclude the presence or absenceof a nominal anchor currency.
The third column of the Appendix table summarizes the results of volatil-ity calculations for the period January 1990–December 1996, reporting onlythe name of the currency with the smallest volatility and its magnitude.12
The names of currencies are indicated as follows: USD 5 U.S. dollar;DM 5 deutsche mark; FF 5 French franc; JY 5 Japanese yen; UKP 5UK pound sterling; ECU 5 European Currency Unit; SDR 5 SpecialDrawing Rights; AD 5 Australian dollar; IR 5 Indian rupee; NZD 5 NewZealand dollar; PE 5 Portuguese escudo; SAR 5 South African rand;SID 5 Singapore dollar; SP 5 Spanish peseta.
Depending on the size of the volatility, the pound signs (#) are attachedto indicate the smallness of volatility; the more pound signs are attached,the smaller is the volatility. It is expected that we will be able to identifywhich currency each country has used as a target for exchange rate stabiliza-tion. If a country’s exchange rate is pegged to a particular currency, forinstance the French franc, exchange rate volatility vis-a-vis the French francshould be zero, while volatility vis-a-vis other currencies should take alarger value. If the exchange rate is variable but stabilized, instead of beingrigidly pegged, to the French franc, volatility vis-a-vis the French francshould be relatively small. If the exchange rate is not stabilized but flexible,volatility with respect to any currency should be large. By examining ex-change rate volatility over successive 5-year periods, we will be able toobserve the changing patterns of exchange rate arrangement for anygiven country.
3. REGRESSION ANALYSES OF EXCHANGERATE MOVEMENTS
The volatility analysis above is useful to identify a single nominal anchorcurrency for a given country; it reveals clear regional diversities across theindustrialized and developing economies. The effectiveness of this ap-proach, however, is limited. It is not suitable when a country adopts a policyof stabilizing its exchange rate to a basket of multiple currencies. To dealwith these more general cases, including currency basket arrangements,one must resort to regression analysis to identify a set of anchor currenciesand find their weights used for exchange rate stabilization. Exchange ratestabilization to a single currency can be interpreted as a special case in
12 Complete volatility data for earlier periods are available upon request from the authors(see also Kawai and Akiyama [1998]).
344 KAWAI AND AKIYAMA
which only one currency is assigned a large positive weight, while othercurrencies’ weights are negligible.
In what follows, we estimate the type of regression equation
De jt 5 a 1 b1DeUSD
t 1 b2DeDMt 1 b3DeJY
t 1 b4DeFFt 1 b5DeUKP
t 1 ut ,
where De jt is the monthly change in the log exchange rate of currency j in
month t, a is a constant term, bk (k 5 1, 2, . . .) is the coefficient on themonthly change in the log exchange rate of currency k, and ut is the residualterm. The estimated standard error of residuals can be interpreted as an-other measure of exchange rate volatility. As before, a monthly change inthe exchange rate is defined by the first difference of the natural logarithmof the nominal exchange rate. We also add to the right-hand side theexchange rates of the SDR, ECU, and other relevant minor, regional curren-cies, reflecting country-specific characteristics. Following Frankel and Wei(1994), we express all the exchange rates in terms of a numeraire currency,the Swiss franc.13 As in the previous exercise, we have removed data obser-vations with values of log first differences greater than 0.1.
The underlying hypothesis is that every country attempts to stabilize itsexchange rate to a basket of multiple currencies. The coefficients on theright-hand–side exchange rates, bk , are interpreted as the weights in acurrency basket assigned by the country’s authorities. A single currencypeg is a special case, where the coefficient on the target currency forexchange rate pegging should be exactly unity, the coefficients on othercurrencies should all be zero, and the value of standard error of regressionresiduals should be zero. If one country’s currency is not pegged rigidly,but is only stabilized, to another particular country’s currency, the SDR,or the ECU, the coefficient estimated for the anchor currency should bestatistically significant and close to unity. Also, the standard error of residualterms should take a sufficiently small value. If a currency is pegged orstabilized to a certain basket of multiple currencies, several coefficientsshould be statistically significant and these coefficients should approxi-mately add to unity. On the other hand, if a currency is on a purely flexibleexchange rate regime, no coefficient should be statistically significant, andthe estimated standard error of the regression residuals would be rela-tively large.
13 In other papers, Frankel and Wei (1993, 1995) use the SDR as a numeraire currency,but we do not follow this procedure because our study often regards the SDR as a potentialcandidate for a nominal anchor. When we examine the behavior of the Swiss franc itself, weexpress all the exchange rates in terms of the Singapore dollar. The regression results forother Western European currencies are qualitatively very similar whether the numerairecurrency is the Swiss franc or the Singapore dollar.
EXCHANGE RATE ARRANGEMENTS 345
Estimation results for the period 1990–1996 are summarized in the fourthcolumn of the Appendix table. These results are obtained after extensivetrial and error using many different combinations of the G-5 currencies, theSDR, the ECU, and relevant regional currencies as explanatory variables ineach currency’s regression. For each country, a regression equation withthe highest explanatory power, measured by the adjusted R2 and reasonablecoefficient estimates, is chosen and reported. The table reports currencynames and coefficients that are estimated to be positive and statisticallysignificant at least at the 5% level, the estimated standard error of regressionresiduals (std-res), the number of sample observations used (incl), andthe number of observations deleted (excl).14 Furthermore, the estimatedcoefficients are arranged in order of importance to facilitate identificationof influential currencies. Similar results can also be presented for earlierperiods to capture changing exchange rate policies over time.15 Statisticalsignificance is indicated as follows: coefficients with double asterisks (**)and single asterisks (*) are significant at the 1% and 5% levels, respectively.No asterisk indicates that the coefficient is significant at the 10% level; inthis case only the currency name is listed without the estimated coefficients.
The currencies placed on the right-hand side as explanatory variablesare indicated by symbols identical to the previous case of exchange rate vola-tility.
III. A DESCRIPTIVE SUMMARY OF EXCHANGERATE ARRANGEMENTS
Inspection of the results summarized in the Appendix table reveals thatthe reported exchange rate arrangements are largely consistent with theobserved exchange rate policies, with the exception of a few countries. Thetable provides several findings with respect to the individual countries’exchange rate arrangements. The description here mainly focuses on the1990s but refers to the earlier periods as needs arise.
1. Industrial Countries
The world’s three major currencies, the U.S. dollar, the deutsche mark,and the Japanese yen, exhibit large volatility with respect to one another.This is the essence of the current generalized floating exchange rate system.Currently there is no industrialized country which attempts to stabilize
14 Some data observations are deleted because the left-hand–side variables exceed 0.1in value.
15 A complete set of regression results including those of earlier periods is available uponrequest from the authors or from Kawai and Akiyama (1998).
346 KAWAI AND AKIYAMA
exchange rates vis-a-vis the U.S. dollar, except for Canada. Canada in factdid so tightly until the 1980s and still continues to use the U.S. dollar as atarget currency. In Australia and New Zealand, target currencies havealternated among the U.S. dollar, SDR, and each other’s currencies.
Industrial countries may be divided into three broad groups: (a) theUnited States and countries that have tended to more or less stabilize theirexchange rates to the U.S. dollar, namely, Canada, Australia, and NewZealand; (b) most Western European countries that tend to stabilize theirrates to the deutsche mark, French franc, and ECU; and (c) Japan, whichdoes not stabilize its rate to the U.S. dollar or any other Western Euro-pean currency.
Looking at the first group, the weight of the U.S. dollar in Canada’sexchange rate movements has always been statistically significant and closeto unity since the beginning of the 1970s. Canada is the only country inthe industrialized world that can be said to belong effectively to the U.S.dollar bloc. The Australian and New Zealand dollars have been influencedby the U.S. dollar, each other’s currency, the SDR, and a few Europeancurrencies such as the UK pound.
The second group, the Western European countries, may be dividedfurther into five subgroups, depending on the degree of linkage with thedeutsche mark. The first subgroup includes Austria, France, the Nether-lands, and Switzerland, which have chosen the deutsche mark as theirprimary target for exchange rate stabilization. The second subgroup in-cludes Belgium, Denmark, and Luxembourg, which have chosen thedeutsche mark or the ECU as their primary target for some time but haverecently shifted increasingly toward the French franc. The third subgroupincludes Finland, Greece, Italy, and Spain, which have chosen the U.S.dollar and UK pound, in addition to the deutsche mark or French franc,as their anchor currencies. The fourth subgroup includes Iceland, Ireland,Norway, and Sweden, which have chosen the ECU as their primary targetfor exchange rate stabilization. Finally, the United Kingdom constitutesthe fifth subgroup in that it has not used any European currency for thepurpose of exchange rate stabilization and, hence, has been quite indepen-dent of European exchange rate arrangements.
Japan’s exchange rate has been moving independent of the U.S. dollarand the major European currencies. With estimated standard error of re-gression residuals of approximately 0.02, a level comparable to that ofthe United States, the Japanese yen’s exchange rate volatility has beensignificantly large and among the largest of the industrialized nations.
2. Developing Countries
(a) Africa. In Africa, there are countries which have maintained fixedexchange rate arrangements vis-a-vis single currencies. These countries
EXCHANGE RATE ARRANGEMENTS 347
include 14 CFA Franc Area members plus Comoros, which peg their curren-cies to the French franc; Common Monetary Union members (Lesotho,Namibia, and Swaziland), which peg their rates to the South African rand;and persistent U.S. dollar peggers (Djibouti and Liberia). The regressioncoefficients for these countries are close to unity, and the standard errorof regression residuals, a conditional measure of exchange rate volatility,is small and typically less than 0.01.
A few other countries have also managed to maintain relatively stableexchange rates vis-a-vis the SDR (Seychelles), the ECU (Mauritius andTunisia in the 1990s), and the Portuguese escudo (Cape Verde).
A number of other countries have had flexible exchange rate arrange-ments with frequent changes in the list of influential major currencies overtime and with a relatively large standard error of residuals. Their targetcurrencies are often the U.S. dollar or SDR, though the magnitude ofvolatility is large. Western European currencies, such as the French franc,the UK pound sterling, the Spanish peseta, and the Portuguese escudo, arealso often target currencies, though the degree of stabilization is low.
The South African rand, the regional key currency for the CommonMonetary Union, has been affected, though not tightly, by both the U.S.dollar and the UK pound, suggesting that South Africa cannot be entirelydescribed as either a U.S.-dollar or pound-sterling area country. Its standarderror of residual terms has varied over time between 0.01 and 0.03.
(b) Asia. Many Asian economies have consistently exhibited stableexchange rates, with small values of volatility (often less than 0.01), andhave not frequently altered their target or nominal-anchor currencies overtime.16 However, only a small number of economies maintain a relativelyrigid peg; Afghanistan and Micronesia (the U.S. dollar), Bhutan (the Indianrupee), and Kiribati (the Australian dollar) are examples of such econo-mies.17 Many other Asian countries, instead of rigidly pegging their ex-change rates, tend to stabilize their rates in terms of the U.S. dollar (Bangla-desh, Indonesia, Korea, Laos, Taiwan, and Thailand), the SDR (Fiji,Myanmar, and Singapore), or important regional currencies (Brunei Darus-salam in terms of the Singapore dollar). Recently, Bangladesh and HongKong have been stabilizing their rates to the U.S. dollar.
As a result, the regression results for many Asian countries reveal that
16 The recent currency and financial turmoil in East Asia, particularly in Thailand, Indonesia,Malaysia, the Philippines, and Korea, suggests that their exchange rate movements may havedeviated from the historical patterns observed until 1996. As a result, our analysis doesnot cover the recent turmoil period because of a lack of a sufficiently large number ofdata observations.
17 The reported exchange rate arrangement of Afghanistan is independently floating startingwith December 1991, but its currency, Afghanis, is pegged to the U.S. dollar throughoutthe 1990s.
348 KAWAI AND AKIYAMA
the weight of the U.S. dollar is almost always significant and large andthat the standard error of the residuals is relatively small. Pakistan, thePhilippines, and Vietnam are also countries that attempt to stabilize theirrates to the U.S. dollar. Malaysia attempts to stabilize its rates to currencybaskets, with the U.S. dollar the largest weight. Countries which oncepegged or are currently pegging their exchange rates to non-SDR basketsof currencies give some weight to the U.S. dollar in their respective baskets.These countries include Singapore and Pacific island nations such as Fiji,Papua New Guinea, the Solomon Islands, and Tonga.
There are a few exceptions in which the U.S. dollar has no role: Bhutan(tightly pegged to the Indian rupee throughout the sample period), Kiribati(tightly pegged to the Australian dollar since the 1980s), and Brunei Darus-salam (stabilized to the Singapore dollar). While Myanmar has stabilizedits currency to the SDR, the U.S. dollar’s influence can also be detectedin certain periods.
Regional currencies play important roles in Asia. The Australian, NewZealand, and Singapore dollars are sometimes included in the currencybaskets of the Pacific island nations. The Singapore dollar exerts a certaininfluence over the Malaysian ringgit and, in earlier periods, influenced theThai baht.18 The Indian rupee not only is a currency peg target for Bhutanbut also is emerging as a target for currency stabilization for Nepal. TheIndian rupee itself has been influenced by the U.S. dollar and the UK pound;the U.S. dollar’s importance in the determination of rupee movements hasrisen significantly in the 1990s.
As has been emphasized by Frankel and Wei (1993, 1994, 1995), the roleof the Japanese yen as a nominal anchor has been virtually nonexistent inAsia. There are economies that assign some weight to the Japanese yen,but the number of such economies is limited and the magnitude of thatweight is small. For example, in the 1990s, Fiji has assigned a weight of0.15 to the Japanese yen (while assigning a weight of 0.30 to the U.S.dollar), both Taiwan and Thailand have assigned about 0.11 to the yen(while respectively assigning 0.79 and 0.82 to the U.S. dollar), and Koreahas assigned 0.10 to the yen (while assigning 0.91 to the dollar). It shouldbe noted, however, that despite its small size, the weight of the Japaneseyen is bigger than that of any European currency. Essentially, though theJapanese yen is more influential than any European currency in Asianexchange rate policies, it is still far from capable of rivaling the U.S. dollarin the region.19
18 Though the Appendix table does not report regression results for recent years, the Thaibaht has had significant effects on the Laotian kip in the last several years.
19 See Hamada and Horiuchi (1987), Tavlas and Ozeki (1992), Ito (1993), Garber (1996),and Kawai (1996) for explanations of the limited use of the Japanese yen as an internationalcurrency, even in East Asia.
EXCHANGE RATE ARRANGEMENTS 349
(c) Europe. In developing Europe, no country has persistently main-tained a rigid exchange-rate peg policy and only a few countries havemaintained stable exchange rates. Estonia has stabilized its exchange rateto the deutsche mark, while Cyprus, the Czech Republic, Latvia, and Maltaappear to be stabilizing their exchange rates to the currency baskets con-sisting of the U.S. dollar and major European currencies including theECU. Apart from these exceptions, the standard error of residuals is largein general: volatility of less than 0.02 is rare while values greater than 0.03are often observed. At such high levels of volatility, it is difficult to identifyany type of exchange rate arrangement other than flexible rate regimes.
Despite large fluctuations in their exchange rates, many countries indeveloping Europe attempt to stabilize their rates in terms of the U.S.dollar, the deutsche mark, the French franc, the UK pound, or some basketof these. The U.S. dollar has been chosen as the primary target for stabiliza-tion by Albania, Bulgaria, Lithuania, Moldova, Poland, Turkey, andUkraine. Major European currencies have provided a loose target for Mace-donia (deutsche mark), Slovak Republic (French franc), and Slovenia(deutsche mark).
(d) Middle East. Without exception all countries in the Middle Eaststabilize their exchange rates to the U.S. dollar and/or the SDR; no othermajor currency plays a nominal anchor role. Since the latter half of the1970s, Bahrain, Egypt, Iraq, Oman, Qatar, Saudi Arabia, Syria, the UnitedArab Emirates (UAE), and Yemen have pegged their exchange rates tothe U.S. dollar, either rigidly or relatively tightly; the regression coefficientson the U.S. dollar have been either exactly unity or very close to unity,and the standard error of residuals has always been less than 0.01. Iran,Kuwait, and Libya, which stabilized their exchange rates in terms of theSDR (or together with the U.S. dollar) in the early 1970s, raised the weightof the U.S. dollar later but subsequently reverted to SDR (together withthe U.S. dollar) targeting; their standard error of residuals has been keptbelow 0.01.
Israel and Lebanon have not maintained stable exchange rates amongcountries in the Middle East, with high standard errors of regression residu-als exceeding 0.02. With relatively large volatility, they have attempted toloosely stabilize their currencies in terms of the U.S. dollar and a currencybasket containing the SDR.
(e) Western Hemisphere. In Latin America, the regression coefficientson the U.S. dollar have almost always been significantly positive and closeto unity, particularly since the second half of the 1970s.20 Sterling Area
20 In the first half of the 1970s, the coefficient on the UK pound was significant and closeto unity for Sterling Area countries; these countries include Eastern Caribbean CurrencyArea members (Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia,and St. Vincent and the Grenadines), Belize, Barbados, Guyana, and Trinidad and Tobago.
350 KAWAI AND AKIYAMA
countries had shifted their nominal anchor currencies from the UK poundto the U.S. dollar by the second half of the 1970s, and the U.S. dollar hassince been the major nominal anchor currency in all of Latin America.Even for countries with large exchange rate volatility, the U.S. dollar isthe primary target currency. We observe some weights assigned to theJapanese yen for Chile and Guatemala, which possibly reflects explicitexchange rate policies in these countries.
Because of the dominance of the U.S. dollar as nominal anchor currencyin Latin America, the only thing that really matters for these countries isthe degree of exchange rate stabilization to the dollar. These countries canbe classified into three groups. The first group consists of rigid U.S.-dollarpeggers, including Eastern Caribbean Currency Area (ECCA) members,Aruba, the Bahamas, Barbados, Belize, the Netherlands Antilles, and Pan-ama. The second group consists of countries which do not peg, or are unableto peg, to the U.S. dollar because of occasional currency devaluations.Still, they have stabilized their exchange rates vis-a-vis the dollar relativelytightly. This group includes Bolivia, Colombia, Costa Rica, El Salvador,Guyana, and Suriname. The third group consists of all other countries,which historically have been incapable of maintaining stable exchange ratesdue to high inflation and frequent currency devaluations. This group in-cludes Argentina, Brazil, Chile, Jamaica, and Peru. It should be noted,however, that some countries in the last group, notably Argentina, haveadopted rigid stabilization policies vis-a-vis the U.S. dollar in the mostrecent period. Not surprisingly, the regression coefficients on the U.S. dollarare close to unity in most cases even for the last group.
IV. THE RELATIVE SIZES OF MAJOR CURRENCY AREAS
In the preceding sections, we have identified what currency or basket ofcurrencies has been chosen by each country as a nominal anchor, i.e., atarget for exchange rate stabilization. In this section, we use these resultsto investigate several important issues. First, we attempt to measure therelative economic size of countries under fixed and flexible exchange rateregimes and how such relative sizes have changed over time. Second, weexamine how the relative influence of the world’s major currencies haschanged over time since the collapse of the Bretton Woods system. Third,we estimate the possible size of a currency area governed by the newEuropean single currency, the euro, relative to the size of currency areasproduced by the U.S. dollar and the Japanese yen. The objective here isto gain insight into the evolution of the international monetary system byquantitatively gauging the changing patterns of exchange rate arrangements
EXCHANGE RATE ARRANGEMENTS 351
and the changing sizes of the major currency areas including the prospectiveeuro zone.
1. The Changing Shares of Countries under Fixed and FlexibleExchange Rate Regimes
It is often argued that since the breakdown of the Bretton Woods system,many countries have shifted away from fixed to more flexible exchangerate regimes. This argument rests typically on shifts in regimes observedfrom reported exchange rate arrangements.21 We present our own measuresof relative shares of fixed versus flexible rate arrangements and compareour results with those that would be obtained on the basis of reported classi-fication.
Our definition here is based on the magnitude of the estimated standarderrors of regression residuals, a measure of conditional volatility, derivedfrom regression equations of exchange rate movements. Since there is nodefinite demarcation line in volatility between fixed and flexible exchangerate regimes, we present two cases for both fixed and flexible rate regimes.Countries under fixed rate regimes may be defined as those with (a) volatil-ity less than 0.005 or (b) volatility less than 0.010. Countries under flexiblerate regimes may be defined as those with (c) volatility greater than 0.015or (d) volatility greater than 0.010. We have calculated the economic size,measured in terms of gross domestic product (GDP) (in U.S. dollars) ortotal trade flows (exports plus imports), of all countries falling into thesefour categories for each of the six subperiods between 1970 and 1996. Forthe sake of comparison, we have also calculated the economic size ofcountries under fixed and flexible rate regimes using reported arrangements;fixed rate regimes include a peg to a single currency, SDR, and othercurrency composite, and flexible rate regimes include managed floating andindependently floating. Our sample size is fixed at 82 countries for theentire period.22
21 For example, the World Economic Outlook (WEO) of 1997, an IMF publication, devoteda chapter to present a view that developing countries have generally shifted their exchangerate regimes from fixed to flexible rate regimes. The report compares the share of total outputof developing countries under fixed exchange rate arrangements with that of developingcountries under flexible rate arrangements. The WEO definition of exchange rate regimes isbased on reported classification, as was summarized in the first column of Table II. Morespecifically, countries under fixed rate arrangements include those reported to be on a singlecurrency peg, a peg to the SDR, and a peg to other currency composite, and countriesunder flexible rate arrangements include those reported to be on managed floating andindependently floating.
22 Note that the number of countries under investigation in the WEO study varies for eachyear. To quantitatively assess the global shifts of exchange rate regimes over time, it is moreappropriate to fix the sample size throughout the sample period.
352 KAWAI AND AKIYAMA
The results are presented in Fig. 1 for the group of industrial countriesand in Fig. 2 for the group of developing countries. In each figure, wepresent measures based on GDP and total trade flows. These measuresare averages over each 5-year period, except the last one, which covers1995–1996, because the estimated standard errors of regression residualsare obtained only for each 5-year period.23 If we measure the economicsize of countries under fixed and flexible exchange rate regimes usingreported arrangements, it is clear that for both industrial and developingcountries the economic share of countries under fixed rate regimes exhibitsa trend decline and that the economic share of countries on flexible rateregimes displays a trend increase.24 On the other hand, if we measure theeconomic sizes of countries under the two regimes using the estimatedmagnitudes of exchange rate volatility, we observe no clear trend of adeclining share of fixed rate regimes or of a rising share of flexible rateregimes. In particular, many developing countries still maintain de factofixed rate regimes when the GDP-based or trade-based economic size isused. Such results are more pronounced if we adopt the less restrictivedefinition of fixed and flexible rate regimes above, i.e., distinguishing thetwo regimes by the volatility measure of 0.010. With this definition, theeconomic share of industrial countries under fixed rate regimes for the1990s is about 25% (GDP based) or 42% (trade based) and their shareunder flexible rate regimes is 75% (GDP based) or 58% (trade based). Theeconomic share of developing countries under fixed rate regimes is 51%(GDP based) or 69% (trade based) and their share under flexible rateregimes is 48% (GDP based) or 31% (trade based).
2. The Changing Relative Sizes of the Major Currency Areas
(a) Definition of Currency Areas. To calculate the economic size ofa currency area, various variables can be used; output, trade flows, andfinancial aggregates are important candidates. In this paper, we use GDPfor output, exports plus imports for trade flows, and official holdings offoreign exchange reserves, money supplies, and stock market capitalizationsfor financial aggregates, all expressed as current U.S. dollar values. Byusing these different economic variables as the basis for measuring the sizeof currency areas, we can explain how these different economic variablescharacterize the differing natures of major currency areas. In addition, weexpect to further our understanding of the changing importance of themajor currencies as nominal anchors for the rest of the world. As major
23 The measures of economic size based on reported arrangements are also averages overeach 5-year period and are obtained from the annual measures which are computed usinginformation on the year-end arrangements.
24 This is consistent with the WEO study.
EXCHANGE RATE ARRANGEMENTS 353
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354 KAWAI AND AKIYAMA
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EXCHANGE RATE ARRANGEMENTS 355
currencies, we again consider those of the G-5 countries (i.e., the UnitedStates, Germany, France, the United Kingdom, and Japan) in addition tothe SDR and the ECU.
Each of the G-5 currencies is assumed to form a currency area of itsown. If any country rigidly pegs its exchange rate to a particular currency,its entire economy, whether measured by output, trade flows, or financialaggregates, is classified as belonging to the currency area formed by thisparticular currency. If a country does not peg its exchange rate to a singlecurrency but instead stabilizes its exchange rate by assigning several differ-ent weights to a basket of multiple currencies, its economy is dividedaccording to these weights and distributed to the corresponding currencyareas. The coefficients which were estimated in the previous section to bestatistically significant, at least at the 5% level, are interpreted as the weightsassigned by the authorities to the corresponding currencies. If a countrydoes not stabilize its exchange rate against any single currency or currencybasket, its economy is considered not to belong to any currency area; itadopts flexible exchange rates vis-a-vis the major currencies.
In this calculation, we undertake the following four procedures. First, toevaluate the changing importance of the G-5 currencies, the SDR, and theECU as nominal anchors, we have decided to fix the sample size over timeby selecting only those countries for which data are available throughoutthe entire period under consideration, 1970–1996. It turns out that datafor GDP, exports, imports, official holdings of foreign exchange reserves(total reserves minus gold), and money supply (money plus quasi-money)are available for 82 countries over the entire sample period. Data for stockmarket capitalizations are available only for the 1980–1996 period. A fixedsample size is chosen in order to determine how the choice of economicvariable affects our conclusion.25
Second, to calculate the economic size of currency areas formed by theG-5 currencies, the SDR, and the ECU, we take two intermediate steps.We first calculate the size of the currency area formed by each of the
25 We use annual data for 1970 through 1996. Most data series are taken from the IFSdatabase and, if necessary, are supplemented by national sources. Data for stock marketcapitalizations are taken from the International Finance Corporation’s Emerging Stock MarketFactbook, which provides comprehensive data only for the period 1980–1996. Data for GDPand trade flows are converted into U.S. dollars at the annual average exchange rate and datafor money supply at the end-of-the-year exchange rate. We have selected only those countrieswhere data series for GDP, exports, imports, official foreign exchange reserves, and moneysupply are available from 1970 through 1994. When data for recent years 1995 and 1996 arenot available, we have constructed missing observations by extrapolating the past trend inorder to keep important countries in our sample. Countries in the former Soviet bloc areunderrepresented in our sample due to the lack of data in earlier periods. Many Africancountries are also eliminated from the sample. In terms of economic size, our sample of 82countries covers a substantial part of economic activity around the globe.
356 KAWAI AND AKIYAMA
G-5 currencies, the SDR, the ECU, and the currencies of minor, regionalcountries (Australia, India, New Zealand, Portugal, Singapore, South Af-rica, Spain, and Thailand). We next distribute the currency areas formedby minor, regional currencies to the larger currency areas formed by theG-5 currencies, the SDR, and the ECU, using the estimated regressioncoefficients for the minor, regional countries.26
Third, the weights are obtained from the estimated coefficients of aregression equation, which are positive and statistically significant at the5% level or above. If the sum of the estimated coefficients is equal to orless than one, their values are used as weights. If the sum exceeds unity,all the coefficients are proportionally re-scaled to make the sum equalto one.
Finally, the economic size of a currency area is calculated for each 5-year period using the estimated coefficients for the corresponding 5-yearestimation period. This is how averages over each of the 5-year periodsare obtained.
(b) Changing economic sizes of the major currency areas. Table IIsummarizes the changing economic sizes of the major currency areas ex-pressed as percentages of the world’s total economic size.27 Since the sizesof the deutsche mark (DM) and French franc (FF) areas tend to fluctuateinversely over time, we also calculate the sum of these two currency areas(DM plus FF) as well as the combined currency area formed by the threemajor European countries (the sum of the DM, FF, and UK pound areas).
Changes in the relative economic sizes of the G-5 currency areas displaydifferent patterns depending on which variable is used to calculate theirsizes. When the size of a currency area is measured in terms of GDP (thefirst section of Table II), we observe that the share of the U.S. dollar areawas large at 53.0% of the world total in the 1970–1975 period, but hasdiminished over time by 6.0 percentage points since then to 46.9% in the1990–1996 period. The share of the combined European currency area hasrisen slightly over time and stands at 24.1% (for DM plus FF) and 31.6%(for DM 1 FF 1 UKP) in the 1990–1996 period. The economic share of
26 The regression equations for Australia and New Zealand, respectively, include the NewZealand dollar and the Australian dollar as explanatory variables on the right-hand side:
DeAD 5 aA 1 bA1 DeUSD 1 bA
2 DeDM 1 bA3 DeJY 1 bA
4 DeFF 1 bA5 DeUKP 1 bA
6 DeSDR 1 bA7 DeNZD 1 uA,
DeNZD 5 aN 1 bN1 DeUSD 1 bN
2 DeDM 1 bN3 DeJY 1 bN
4 DeFF 1 bN5 DeUKP 1 bN
6 DeSDR 1 bN7 DeAD 1 uN.
To assign the economies of Australia and New Zealand to the currency areas formed by theG-5 currencies and the SDR (the ECU does not appear on the right-hand side of eitherequation), the two estimated equations above are solved for DeAD and DeNZD and the resultingcoefficients of the G-5 currencies and the SDR are used as these weights.
27 Detailed regional breakdowns of the major currency areas for the period 1970–1989 arealso available in Kawai and Akiyama (1998).
EXCHANGE RATE ARRANGEMENTS 357T
AB
LE
IIT
heE
stim
ated
Per
cent
age
Shar
esof
Cur
renc
yA
reas
for
the
G-5
Cur
renc
ies,
the
SDR
,an
dth
eE
CU
,19
90–1
996
U.S
.D
euts
che
Fre
nch
UK
dolla
rJa
pane
sem
ark
fran
cpo
und
SDR
EC
UD
M1
FF
DM
1F
F1
UK
area
yen
area
area
area
area
area
area
Oth
erar
eaar
eaT
otal
(1)
Mea
sure
dG
ross
Dom
esti
cP
rodu
ct(G
DP
)in
Cur
rent
U.S
.Dol
lars
1970
–74
Tot
al53
.011
.011
.48.
27.
63.
92.
52.
519
.727
.210
0.0
1975
–79
Tot
al49
.412
.617
.18.
57.
32.
10.
52.
625
.532
.910
0.0
1980
–84
Tot
al51
.412
.312
.29.
97.
53.
40.
13.
122
.129
.610
0.0
1985
–89
Tot
al50
.216
.815
.77.
96.
11.
40.
01.
923
.629
.610
0.0
1990
–96
Tot
al46
.917
.512
.411
.87.
50.
71.
61.
824
.131
.610
0.0
1990
–96
Reg
iona
lbr
eakd
own
Indu
stri
alco
untr
ies
32.1
17.1
11.9
11.3
7.3
0.4
1.5
0.9
23.3
30.6
82.6
EU
-fift
een
1.0
0.0
11.0
11.3
7.0
0.0
0.9
0.7
22.3
29.4
31.9
Ger
man
y0.
00.
08.
40.
00.
00.
00.
00.
08.
48.
48.
4F
ranc
e0.
00.
00.
05.
70.
00.
00.
00.
05.
75.
75.
7U
nite
dK
ingd
om0.
00.
00.
00.
04.
50.
00.
00.
00.
04.
54.
5U
nite
dSt
ates
27.9
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
27.9
Japa
n0.
017
.10.
00.
00.
00.
00.
00.
00.
00.
017
.1O
ther
3.2
0.0
1.0
0.0
0.3
0.4
0.6
0.3
1.0
1.2
5.7
Dev
elop
ing
coun
trie
s14
.80.
30.
40.
40.
10.
40.
10.
80.
81.
017
.4A
fric
a0.
60.
00.
00.
20.
10.
00.
10.
10.
30.
41.
2A
sia
7.2
0.3
0.0
0.2
0.0
0.3
0.0
0.2
0.2
0.2
8.2
Eur
ope
0.4
0.0
0.0
0.0
0.0
0.0
0.0
0.3
0.0
0.0
0.7
Mid
dle
Eas
t1.
00.
00.
00.
00.
00.
00.
00.
10.
00.
01.
1W
este
rnH
emis
pher
e5.
70.
00.
30.
00.
00.
10.
00.
00.
30.
46.
2
(2)
Mea
sure
dby
Tot
alT
rade
Flo
ws
(Exp
orts
plus
Impo
rts)
inC
urre
ntU
.S.D
olla
rs19
70–7
4T
otal
33.8
10.0
20.5
11.0
10.2
6.1
4.8
3.6
31.5
41.7
100.
019
75–7
9T
otal
36.8
9.3
28.6
9.8
9.4
1.6
0.8
3.6
38.4
47.9
100.
019
80–8
4T
otal
38.9
9.9
21.8
12.9
9.2
2.7
0.2
4.3
34.8
44.0
100.
019
85–8
9T
otal
39.6
10.5
28.1
9.5
7.9
1.4
0.0
3.0
37.7
45.5
100.
019
90–9
6T
otal
40.5
8.8
18.9
14.8
9.1
2.4
2.8
2.7
33.7
42.8
100.
0
(con
tinue
d)
358 KAWAI AND AKIYAMAT
AB
LE
II—
Con
tinue
d
U.S
.D
euts
che
Fre
nch
UK
dolla
rJa
pane
sem
ark
fran
cpo
und
SDR
EC
UD
M1
FF
DM
1F
F1
UK
area
yen
area
area
area
area
area
area
Oth
erar
eaar
eaT
otal
1990
–96
Reg
iona
lbr
eakd
own
Indu
stri
alco
untr
ies
20.2
8.2
18.7
14.0
8.9
0.4
2.7
1.7
32.7
41.6
74.7
EU
-fift
een
1.2
0.0
17.2
14.0
8.6
0.0
1.8
1.2
31.1
39.8
44.0
Ger
man
y0.
00.
010
.90.
00.
00.
00.
00.
010
.910
.910
.9F
ranc
e0.
00.
00.
06.
30.
00.
00.
00.
06.
36.
36.
3U
nite
dK
ingd
om0.
00.
00.
00.
05.
80.
00.
00.
00.
05.
85.
8U
nite
dSt
ates
14.5
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
14.5
Japa
n0.
08.
20.
00.
00.
00.
00.
00.
00.
00.
08.
2O
ther
4.5
0.0
1.5
0.0
0.3
0.4
0.9
0.5
1.5
1.8
8.0
Dev
elop
ing
coun
trie
s20
.30.
60.
20.
80.
22.
00.
21.
01.
01.
225
.3A
fric
a1.
00.
00.
10.
30.
20.
00.
10.
20.
40.
52.
0A
sia
13.7
0.6
0.1
0.4
0.0
1.9
0.0
0.2
0.5
0.5
16.9
Eur
ope
0.3
0.0
0.0
0.0
0.0
0.0
0.0
0.3
0.0
0.0
0.6
Mid
dle
Eas
t1.
60.
00.
00.
00.
00.
00.
00.
20.
00.
01.
9W
este
rnH
emis
pher
e3.
70.
00.
10.
00.
00.
10.
00.
00.
10.
13.
9
(3)
Mea
sure
dby
For
eign
Exc
hang
eR
eser
ves
inC
urre
ntU
.S.D
olla
rs19
70–7
4T
otal
26.4
13.2
24.7
7.6
7.9
11.5
4.0
4.7
32.3
40.2
100.
019
75–7
9T
otal
35.5
11.5
30.2
5.7
8.2
3.3
1.2
4.3
35.9
44.2
100.
019
80–8
4T
otal
39.1
9.1
25.8
13.0
7.6
1.2
0.1
4.0
38.8
46.5
100.
019
85–8
9T
otal
36.5
14.5
25.5
10.9
7.5
1.8
0.0
3.3
36.4
43.9
100.
019
90–9
6T
otal
37.5
13.0
16.0
13.7
8.0
4.6
4.1
3.1
29.7
37.7
100.
019
90–9
6R
egio
nal
brea
kdow
nIn
dust
rial
coun
trie
s10
.411
.515
.411
.67.
90.
53.
92.
127
.034
.963
.3E
U-fi
ftee
n1.
20.
012
.411
.67.
60.
02.
11.
624
.131
.736
.5G
erm
any
0.0
0.0
7.9
0.0
0.0
0.0
0.0
0.0
7.9
7.9
7.9
Fra
nce
0.0
0.0
0.0
2.9
0.0
0.0
0.0
0.0
2.9
2.9
2.9
Uni
ted
Kin
gdom
0.0
0.0
0.0
0.0
4.0
0.0
0.0
0.0
0.0
4.0
4.0
Uni
ted
Stat
es6.
80.
00.
00.
00.
00.
00.
00.
00.
00.
06.
8Ja
pan
0.0
11.5
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
11.5
Oth
er2.
40.
03.
00.
00.
30.
51.
80.
53.
03.
38.
5D
evel
opin
gco
untr
ies
27.1
1.5
0.6
2.1
0.1
4.1
0.2
1.0
2.7
2.8
36.7
Afr
ica
0.4
0.0
0.1
0.3
0.0
0.0
0.1
0.1
0.5
0.5
1.2
Asi
a14
.81.
30.
11.
70.
13.
80.
00.
11.
81.
921
.9E
urop
e0.
50.
00.
00.
00.
00.
00.
10.
40.
00.
00.
9M
iddl
eE
ast
2.7
0.0
0.0
0.0
0.0
0.0
0.0
0.4
0.0
0.0
3.2
Wes
tern
Hem
isph
ere
8.7
0.1
0.4
0.0
0.0
0.3
0.0
0.0
0.4
0.4
9.5
EXCHANGE RATE ARRANGEMENTS 359
(4)
Mea
sure
dby
Mon
eySu
pply
(Mon
eypl
usQ
uasi
-Mon
ey)
inC
urre
ntU
.S.D
olla
rs19
70–7
4T
otal
53.9
15.3
10.3
8.0
5.0
3.1
2.6
2.0
18.2
23.2
100.
019
75–7
9T
otal
44.8
17.9
16.3
9.4
5.3
2.9
0.5
2.8
25.8
31.0
100.
019
80–8
4T
otal
48.4
19.3
12.8
11.1
5.2
0.9
0.1
2.3
23.9
29.1
100.
019
85–8
9T
otal
41.7
26.0
16.0
8.1
5.9
0.9
0.0
1.4
24.1
30.0
100.
019
90–9
6T
otal
36.7
27.7
12.4
11.1
8.9
0.7
1.1
1.4
23.5
32.4
100.
019
90–9
6R
egio
nal
brea
kdow
nIn
dust
rial
coun
trie
s27
.827
.312
.310
.58.
80.
31.
11.
022
.831
.689
.1E
U-fi
ftee
n0.
80.
010
.610
.58.
60.
00.
60.
621
.229
.731
.7G
erm
any
0.0
0.0
7.6
0.0
0.0
0.0
0.0
0.0
7.6
7.6
7.6
Fra
nce
0.0
0.0
0.0
5.3
0.0
0.0
0.0
0.0
5.3
5.3
5.3
Uni
ted
Kin
gdom
0.0
0.0
0.0
0.0
6.2
0.0
0.0
0.0
0.0
6.2
6.2
Uni
ted
Stat
es24
.40.
00.
00.
00.
00.
00.
00.
00.
00.
024
.4Ja
pan
0.0
27.3
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
27.3
Oth
er2.
60.
01.
70.
00.
20.
30.
50.
41.
71.
95.
6D
evel
opin
gco
untr
ies
8.9
0.4
0.1
0.6
0.1
0.4
0.1
0.4
0.7
0.8
10.9
Afr
ica
0.4
0.0
0.0
0.1
0.1
0.0
0.0
0.1
0.2
0.2
0.7
Asi
a5.
70.
40.
00.
40.
00.
30.
00.
10.
50.
56.
9E
urop
e0.
10.
00.
00.
00.
00.
00.
00.
10.
00.
00.
3M
iddl
eE
ast
0.9
0.0
0.0
0.0
0.0
0.0
0.0
0.2
0.0
0.0
1.1
Wes
tern
Hem
isph
ere
1.8
0.0
0.1
0.0
0.0
0.0
0.0
0.0
0.1
0.1
2.0
(con
tinue
d)
360 KAWAI AND AKIYAMA
TA
BL
EII
—C
ontin
ued
U.S
.D
euts
che
Fre
nch
UK
dolla
rJa
pane
sem
ark
fran
cpo
und
SDR
EC
UD
M1
FF
DM
1F
F1
UK
area
yen
area
area
area
area
area
area
Oth
erar
eaar
eaT
otal
(5)
Mea
sure
dby
Stoc
kM
arke
tC
apit
aliz
atio
nsin
Cur
rent
U.S
.Dol
lars
1970
–74
Tot
alN
AN
AN
AN
AN
AN
AN
AN
AN
AN
AN
A19
75–7
9T
otal
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
1980
–84
Tot
al63
.517
.75.
02.
28.
80.
60.
02.
07.
316
.110
0.0
1985
–89
Tot
al44
.333
.38.
73.
28.
11.
20.
01.
411
.819
.910
0.0
1990
–96
Tot
al50
.423
.77.
05.
79.
91.
11.
01.
112
.722
.610
0.0
1990
–96
Reg
iona
lbr
eakd
own
Indu
stri
alco
untr
ies
41.0
23.4
6.9
5.4
9.6
0.3
1.0
0.7
12.3
21.9
88.4
EU
-fift
een
0.4
0.0
5.2
5.4
9.3
0.0
0.8
0.3
10.6
19.9
21.4
Ger
man
y0.
00.
03.
40.
00.
00.
00.
00.
03.
43.
43.
4F
ranc
e0.
00.
00.
03.
10.
00.
00.
00.
03.
13.
13.
1U
nite
dK
ingd
om0.
00.
00.
00.
08.
50.
00.
00.
00.
08.
58.
5U
nite
dSt
ates
37.5
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
37.5
Japa
n0.
023
.40.
00.
00.
00.
00.
00.
00.
00.
023
.4O
ther
3.1
0.0
1.7
0.0
0.3
0.3
0.2
0.4
1.7
2.0
6.0
Dev
elop
ing
coun
trie
s9.
40.
30.
10.
30.
30.
80.
00.
40.
40.
711
.6A
fric
a0.
90.
00.
00.
00.
30.
00.
00.
20.
00.
31.
4A
sia
6.1
0.3
0.0
0.2
0.0
0.8
0.0
0.1
0.3
0.3
7.5
Eur
ope
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.1
0.0
0.0
0.2
Mid
dle
Eas
t0.
20.
00.
00.
00.
00.
00.
00.
10.
00.
00.
3W
este
rnH
emis
pher
e2.
10.
00.
10.
00.
00.
00.
00.
00.
10.
12.
2
EXCHANGE RATE ARRANGEMENTS 361
the Japanese yen area has risen by 6.5 percentage points over time andreached 17.5% in the most recent period. To summarize, the relative eco-nomic share of the U.S. dollar area has declined noticeably since the break-down of the Bretton Woods system, while the shares of the Japanese yenarea and the combined European currency area have risen, supplementinga relative decline in the U.S. dollar area.
The fact that the relative GDP share of the United States in our sampleof 82 countries is only 27.9% in 1990–1996 while the share of the U.S. dollararea is 46.9% indicates that the dollar area extends far outside of the UnitedStates. Many developing countries belong to the U.S. dollar area, as dosome other industrial countries such as Canada and, to a lesser extent,Australia and New Zealand. In the developing world, Asia is particularlyimportant as a U.S. dollar area; the Asian U.S. dollar area has grownsteadily from 2.3% in the 1970–1974 period (not shown in Table II) to 7.2%in the 1990–1996 period. The Western Hemisphere also contributes to thelarge size of the U.S. dollar area, standing at 5.7% in 1990–1996. Thedeutsche mark area and the French franc area, 12.4% and 11.8%, respec-tively, in the 1990s, are also greater than the relative GDP shares of thesetwo countries alone (8.4% and 5.7%, respectively). This is due to the factthat currencies of many high-income countries in Western Europe are influ-enced by the DM and FF. In contrast, the size of the Japanese yen area,17.5% in the 1990s, is not much different from the relative GDP share ofJapan itself, which is 17.1%. Essentially, the rise in the relative share of theyen area is due to the rise in the share of the Japanese economy in the world.
When the size of a currency area is measured by total trade flows (exportsplus imports in the second section of Table II), a totally different pictureemerges. The share of the U.S. dollar area has not declined over time buthas instead risen by 6.7 percentage points since the early 1970s. Its sharestands at 40.5% in the 1990–1996 period, which is lower than the GDP-based share of the U.S. dollar area. The relative growth of the trade-basedU.S. dollar area is mostly due to the rapid expansion of trade flows ofAsian countries whose exchange rates are stabilized to the dollar. Thetrade-based relative share of the combined European currency area hasrisen slightly over the same period and stands at 33.7% (for DM 1 FF)and 42.8% (for DM 1 FF 1 UKP) in the 1990s, the highest of all measuresfor the combined European currency area figures.28 On the other hand,the trade-based share of the Japanese yen area has declined since the early1970s by 1.2 percentage points and stands at 8.8% in the 1990s, the lowestof all calculated measures for the yen area. The trade-based yen area hasbeen quite small, essentially because of Japan’s stagnant imports.
The rest of Table II also reports relative shares of major currency areas
28 The trade-based economic size of the combined European currency area is smaller,however, if intra-regional trade is netted out.
362 KAWAI AND AKIYAMA
based on financial aggregates, namely, official foreign exchange reserves,money supplies, and stock market capitalizations. Most impressive is thefact that, based on the money supply measure, the share of the U.S. dollararea has declined substantially from 53.9% in the early 1970s to a meager36.7% in the 1990s; this is the smallest of all measures for the U.S. dollararea. The money-supply–based share of the Japanese yen area, on theother hand, has increased substantially from 15.3% in the early 1970s to27.7% in the 1990s; this is the largest calculated measure for the yen area.Based on the stock market capitalization measure, the share of the U.S.dollar area has declined over time but still maintains a very large share of50.4% in the 1990s, which is the largest for the U.S. dollar area. Thecombined European currency area based on stock market capitalizationsis only 12.7% (DM 1 FF) or 22.6% (DM 1 FF 1 UKP), the smallest ofthese measures for the combined European currency area either way.
To summarize, despite the declining proportion of the U.S. economy inthe world as a whole, the U.S. dollar area has kept its substantial size. Therelative economic share of the U.S. dollar area has shrunk over time, exceptwhen measured by total trade flows, but it is still by far the largest currencyarea in the world. The size of the U.S. dollar area is much larger than thesize of the U.S. economy itself owing to the large number of developingeconomies, particularly in Asia, Latin America, and the Middle East, whichare strongly tied to the U.S. dollar. To a much lesser extent, the deutschemark area and the French franc area are similarly larger than the respectiveeconomies on which they are based. This reflects the Western Europeaneconomies’ exchange rate stabilization policies that target these two curren-cies. Furthermore, the fact that the combined currency area for the deutschemark, the French franc, and the UK pound exceeds the U.S. dollar areain trade-based size suggests that the potential role of the prospective euro,to be introduced in January 1999, is large. In contrast, there is virtually noyen area outside Japan.
3. The Prospects of Currency Areas for the Euro, the U.S. Dollar, andthe Japanese Yen
It is of considerable interest to evaluate the impact of the creation ofthe European EMU and the introduction of a single currency, the euro,on the international monetary system. The questions are whether the newlyintroduced euro will be strong enough to seriously challenge the dominanceof the U.S. dollar and to convert the U.S.-dollar-dominated internationalmonetary system into a regime centered on both the U.S. dollar and theeuro, and what role the Japanese yen will play.29
29 See Alogoskoufis and Portes (1997) and Bergsten (1997), who argue that the introductionof the euro will challenge the U.S. dollar dominance and convert the international monetarysystem into a bipolar system centered on both the U.S. dollar and the euro.
EXCHANGE RATE ARRANGEMENTS 363
For this purpose, we extend the previous analysis to measure the size ofa currency area formed by the prospective euro by using the regressionresults for the 1990s. More specifically, we calculate the economic sizes ofthe prospective euro area, the U.S. dollar area, and the Japanese yen area,employing the same method as the one used previously. However, a widersample of 99 countries is used for such calculation, because we limit ourfocus to only the 1990s, for which data for a larger number of countriesare available.
We consider two possible scenarios with regard to the size of the prospec-tive euro area, depending on which countries form the new EMU. Twoscenarios include the likely case of the EU-eleven (Austria, Belgium, Fin-land, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portu-gal, and Spain) forming the EMU, and the case of the EU-fifteen (the EU-eleven plus Denmark, Greece, Sweden, and the United Kingdom) formingthe EMU. The latter scenario defines the maximum possible size of theEMU in the conceivable future. If EMU membership is confined to the 11countries, it is expected that the size of the euro area will be small whilethe size of the U.S. dollar area will remain large. On the other hand, ifEMU membership includes all European Union countries, the size of theeuro area will be correspondingly larger while the size of the U.S. dollararea will become smaller. The size of the Japanese yen area will probablynot be affected much by the scale of EMU membership.
Table III summarizes the results of these calculations. The table reportsthe relative economic shares for each of the three major currency areas,based on output (nominal GDP), total trade flows (the sum of exportsand imports), and financial aggregates (official foreign exchange holdings,money supplies, and stock market capitalizations). The table shows thatthis choice of variable, whether GDP, trade flows, or financial aggregates,influences the prospective size of the euro and U.S. dollar areas. Takingthe case of the EMU-fifteen, the GDP and financial aggregate measuresindicate that the U.S. dollar area will remain larger than the euro area.For example, using GDP, 46.4% of the world economy is covered by theU.S. dollar area, 34.7% by the euro area, and 17.5% by the Japanese yenarea. The U.S. dollar area is large because many developing countries,particularly those in Asia and Latin America, regard the dollar as the mostimportant global nominal anchor. The Japanese yen area’s share (17.5%)is only slightly larger than the weight of the Japanese economy in the world(17.0%).30 The yen area outside Japan is small and accounts for only 0.5%of the world’s GDP. This underlines the fact that the yen is not yet a full-fledged, global nominal anchor currency.
Not surprisingly, the size of the U.S. dollar area based on stock market
30 These relative share numbers correspond to the figures estimated by other authors suchas Bergsten (1997) and Masson and Turtleboom (1997).
364 KAWAI AND AKIYAMA
TA
BL
EII
IT
heE
stim
ated
Size
ofth
eC
urre
ncy
Are
asfo
rth
eE
uro,
the
U.S
.D
olla
r,an
dth
eJa
pane
seY
enP
erce
ntag
eA
vera
ges
for
1990
–199
6
Cas
eof
EM
U-1
1C
ase
ofE
MU
-15
U.S
.U
KU
.S.
UK
Eur
odo
llar
Japa
nese
poun
dE
uro
dolla
rJa
pane
sepo
und
Reg
iona
lar
eaar
eaye
nar
eaar
eaO
ther
area
area
yen
area
area
Oth
erto
tal
(1)
Mea
sure
dby
Gro
ssD
omes
tic
Pro
duct
(GD
P)
inC
urre
ntU
.S.D
olla
rsIn
dust
rial
coun
trie
s28
.131
.017
.15.
00.
433
.430
.817
.10.
00.
381
.5E
U-fi
ftee
n26
.60.
20.
04.
60.
131
.50.
00.
00.
00.
031
.5C
ore-
six
coun
trie
s17
.20.
00.
00.
00.
017
.20.
00.
00.
00.
017
.2F
ive
othe
rE
MU
mem
bers
7.9
0.0
0.0
0.0
0.0
7.9
0.0
0.0
0.0
0.0
7.9
Den
mar
k,G
reec
e,Sw
eden
,UK
1.4
0.2
0.0
4.6
0.1
6.3
0.0
0.0
0.0
0.0
6.3
Uni
ted
Stat
es0.
027
.50.
00.
00.
00.
027
.50.
00.
00.
027
.5Ja
pan
0.0
0.0
17.0
0.0
0.0
0.0
0.0
17.0
0.0
0.0
17.0
Oth
er1.
53.
30.
10.
40.
31.
93.
30.
10.
00.
35.
6D
evel
opin
gco
untr
ies
1.1
15.7
0.4
0.2
1.1
1.3
15.7
0.4
0.0
1.1
18.5
Afr
ica
0.3
0.7
0.0
0.1
0.2
0.5
0.7
0.0
0.0
0.2
1.4
Asi
a0.
37.
50.
30.
00.
20.
37.
50.
30.
00.
28.
3E
urop
e0.
10.
80.
00.
00.
60.
10.
80.
00.
00.
61.
4M
iddl
eE
ast
0.0
1.0
0.0
0.0
0.1
0.0
1.0
0.0
0.0
0.1
1.2
Wes
tern
Hem
isph
ere
0.4
5.7
0.1
0.0
0.0
0.4
5.7
0.1
0.0
0.0
6.2
Tot
al29
.246
.717
.55.
21.
534
.746
.417
.50.
01.
410
0.0
(2)
Mea
sure
dby
Tot
alT
rade
Flo
ws
(Exp
orts
plus
Impo
rts)
inC
urre
ntU
.S.D
olla
rsIn
dust
rial
coun
trie
s38
.819
.18.
16.
40.
645
.818
.88.
10.
073
.1E
U-fi
ftee
n36
.50.
40.
05.
90.
243
.00.
00.
00.
00.
543
.0
EXCHANGE RATE ARRANGEMENTS 365
Cor
e-si
xco
untr
ies
25.4
0.0
0.0
0.0
0.0
25.4
0.0
0.0
0.0
0.0
25.4
Fiv
eot
her
EM
Um
embe
rs9.
10.
00.
00.
00.
09.
10.
00.
00.
00.
09.
1D
enm
ark,
Gre
ece,
Swed
en,U
K2.
10.
40.
05.
90.
28.
50.
00.
00.
00.
08.
5U
nite
dSt
ates
0.0
14.2
0.0
0.0
0.0
0.0
14.2
0.0
0.0
0.0
14.2
Japa
n0.
00.
08.
00.
00.
00.
00.
08.
00.
00.
08.
0O
ther
2.3
4.6
0.1
0.5
0.5
2.8
4.6
0.1
0.0
0.5
7.9
Dev
elop
ing
coun
trie
s1.
922
.11.
10.
41.
42.
422
.11.
10.
01.
426
.9A
fric
a0.
51.
30.
00.
20.
40.
71.
30.
00.
00.
42.
4A
sia
1.1
14.6
1.0
0.2
0.2
1.3
14.6
1.0
0.0
0.2
17.1
Eur
ope
0.2
0.9
0.0
0.0
0.6
0.2
0.9
0.0
0.0
0.6
1.6
Mid
dle
Eas
t0.
01.
70.
00.
00.
20.
01.
70.
00.
00.
21.
9W
este
rnH
emis
pher
e0.
23.
70.
10.
00.
00.
23.
70.
10.
00.
03.
9T
otal
40.8
41.3
9.2
6.8
2.0
48.1
40.9
9.2
0.0
1.8
100.
0
(3)
Mea
sure
dby
Offi
cial
Hol
ding
sof
For
eign
Exc
hang
eR
eser
ves
inC
urre
ntU
.S.D
olla
rsIn
dust
rial
coun
trie
s31
.58.
610
.84.
50.
636
.68.
210
.80.
00.
456
.0E
U-fi
ftee
n27
.40.
50.
03.
90.
231
.90.
00.
00.
00.
031
.9C
ore-
six
coun
trie
s14
.30.
00.
00.
00.
014
.30.
00.
00.
00.
014
.3F
ive
othe
rE
MU
mem
bers
10.6
0.0
0.0
0.0
0.0
10.6
0.0
0.0
0.0
0.0
10.6
Den
mar
k,G
reec
e,Sw
eden
,UK
2.6
0.5
0.0
3.9
0.2
7.1
0.0
0.0
0.0
0.0
7.1
Uni
ted
Stat
es0.
05.
90.
00.
00.
00.
05.
90.
00.
00.
05.
9Ja
pan
0.0
0.0
10.7
0.0
0.0
0.0
0.0
10.7
0.0
0.0
10.7
Oth
er4.
12.
30.
10.
60.
44.
72.
30.
10.
00.
47.
5D
evel
opin
gco
untr
ies
3.9
35.6
2.1
0.6
1.7
4.6
35.6
2.1
0.0
1.7
44.0
Afr
ica
0.5
0.8
0.0
0.1
0.2
0.7
0.8
0.0
0.0
0.2
1.6
Asi
a2.
723
.01.
90.
40.
33.
123
.01.
90.
00.
328
.2E
urop
e0.
31.
30.
00.
00.
90.
31.
30.
00.
00.
92.
5M
iddl
eE
ast
0.0
2.5
0.0
0.0
0.4
0.0
2.5
0.0
0.0
0.4
2.9
Wes
tern
Hem
isph
ere
0.4
8.1
0.2
0.0
0.0
0.5
8.1
0.2
0.0
0.0
8.7
Tot
al35
.444
.312
.95.
12.
341
.243
.812
.90.
02.
110
0.0
(con
tinue
d)
366 KAWAI AND AKIYAMAT
AB
LE
III—
Con
tinue
d
Cas
eof
EM
U-1
1C
ase
ofE
MU
-15
U.S
.U
KU
.S.
UK
Eur
odo
llar
Japa
nese
poun
dE
uro
dolla
rJa
pane
sepo
und
Reg
iona
lar
eaar
eaye
nar
eaar
eaO
ther
area
area
yen
area
area
Oth
erto
tal
(4)
Mea
sure
dby
Mon
eySu
pply
(Mon
eypl
usQ
uasi
-Mon
ey)
inC
urre
ntU
.S.D
olla
rsIn
dust
rial
coun
trie
s26
.326
.126
.46.
50.
433
.026
.026
.40.
00.
385
.6E
U-fi
ftee
n24
.20.
20.
06.
10.
130
.60.
00.
00.
00.
030
.6C
ore-
six
coun
trie
s16
.10.
00.
00.
00.
016
.10.
00.
00.
00.
016
.1F
ive
othe
rE
MU
mem
bers
7.1
0.0
0.0
0.0
0.0
7.1
0.0
0.0
0.0
0.0
7.1
Den
mar
k,G
reec
e,Sw
eden
,UK
1.0
0.2
0.0
6.1
0.1
7.4
0.0
0.0
0.0
0.0
7.4
Uni
ted
Stat
es0.
023
.30.
00.
00.
00.
023
.30.
00.
00.
023
.3Ja
pan
0.0
0.0
26.3
0.0
0.0
0.0
0.0
26.3
0.0
0.0
26.3
Oth
er2.
12.
60.
10.
30.
32.
42.
60.
10.
00.
35.
4D
evel
opin
gco
untr
ies
0.9
12.2
0.5
0.2
0.7
1.1
12.2
0.5
0.0
0.7
14.4
Afr
ica
0.2
0.4
0.0
0.1
0.1
0.3
0.4
0.0
0.0
0.1
0.8
Asi
a0.
68.
80.
40.
00.
20.
68.
80.
40.
00.
210
.0E
urop
e0.
10.
30.
00.
00.
20.
10.
30.
00.
00.
20.
6M
iddl
eE
ast
0.0
0.9
0.0
0.0
0.1
0.0
0.9
0.0
0.0
0.1
1.0
Wes
tern
Hem
isph
ere
0.1
1.8
0.0
0.0
0.0
0.1
1.8
0.0
0.0
0.0
1.9
Tot
al27
.238
.326
.86.
61.
134
.038
.126
.80.
01.
010
0.0
(5)
Mea
sure
dby
Stoc
kM
arke
tC
apit
aliz
atio
nsin
Cur
rent
U.S
.Dol
lars
Indu
stri
alco
untr
ies
14.7
41.3
22.4
9.0
0.4
23.9
41.1
22.4
0.0
0.4
87.9
EU
-fift
een
12.7
0.2
0.0
8.6
0.1
21.5
0.0
0.0
0.0
0.0
21.5
Cor
e-si
xco
untr
ies
9.0
0.0
0.0
0.0
0.0
9.0
0.0
0.0
0.0
0.0
9.0
Fiv
eot
her
EM
Um
embe
rs2.
70.
00.
00.
00.
02.
70.
00.
00.
00.
02.
7D
enm
ark,
Gre
ece,
Swed
en,U
K1.
00.
20.
08.
60.
19.
90.
00.
00.
00.
09.
9U
nite
dSt
ates
0.0
37.9
0.0
0.0
0.0
0.0
37.9
0.0
0.0
0.0
37.9
Japa
n0.
00.
022
.40.
00.
00.
00.
022
.40.
00.
022
.4O
ther
2.0
3.2
0.1
0.4
0.4
2.4
3.2
0.1
0.0
0.4
6.0
Dev
elop
ing
coun
trie
s0.
710
.10.
50.
40.
41.
110
.10.
50.
00.
412
.1A
fric
a0.
00.
90.
00.
30.
20.
30.
90.
00.
00.
21.
4A
sia
0.5
6.7
0.5
0.1
0.1
0.6
6.7
0.5
0.0
0.1
7.8
Eur
ope
0.0
0.1
0.0
0.0
0.1
0.0
0.1
0.0
0.0
0.1
0.2
Mid
dle
Eas
t0.
00.
30.
00.
00.
10.
00.
30.
00.
00.
10.
3W
este
rnH
emis
pher
e0.
12.
20.
00.
00.
00.
12.
20.
00.
00.
02.
3T
otal
15.4
51.5
22.9
9.4
0.9
25.0
51.3
22.9
0.0
0.8
100.
0
Not
e.T
heco
re-s
ixco
untr
ies
incl
ude
Aus
tria
,Bel
gium
,Fra
nce,
Ger
man
y,L
uxem
bour
g,an
dth
eN
ethe
rlan
ds.F
ive
othe
rE
MU
mem
bers
incl
ude
Fin
land
,Ire
land
,Ita
ly,
Por
tuga
l,an
dSp
ain.
EXCHANGE RATE ARRANGEMENTS 367
capitalizations (51.3%) is more than twice the size of the euro area (25.0%).The size of the U.S. dollar area is large because of the large size of U.S.stock market capitalizations (37.9%), and the size of the euro area is smallbecause of the small size of the EU-fifteen’s stock market capitalizations(21.5%). The relative size of the yen area based on stock market capitaliza-tions is relatively large (22.9%) but remains less than half that of the dollararea. This predominance of the U.S. dollar area suggests that the U.S.dollar will continue to be the world’s most important international currencyif capital market activity is an important factor determining the choice ofnominal anchor currency.
However, the trade flow measure indicates that the euro area will belarger than the U.S. dollar area. The euro area accounts for 48.1% of theworld total trade flows, the U.S. dollar area 40.9%, and the yen area a meager9.2%. Though interpretation of trade-based economic size needs cautionbecause the underlying trade flows do not net out intra-EMU trade flows,the predominance of the euro area measured by trade activity is impressive.This is especially so in contrast to the results based on stock market capitaliza-tions. Essentially, the future relative economic size of the prospective eurodepends on which economic activity will be considered more important tothe world as a whole, stock market activity or trade activity.
One neglected factor has to be mentioned. The development and growthof the economies in Eastern Europe, the Mediterranean, and the formerSoviet Union are expected to enlarge the euro area because many of theseeconomies are being considered for accession to the European Union.Given that these economies are underrepresented in our sample, our calcu-lations may have underestimated the size of the prospective euro area andoverestimated the size of the U.S. dollar area.
V. DETERMINANTS OF OFFICIAL HOLDINGS OF THE G-5CURRENCIES AS FOREIGN EXCHANGE RESERVES
One of the important roles of major international currencies is to serveas foreign exchange reserves for central banks. Researchers have investi-gated the determinants of the reserve currency roles of the major industrial-ized countries’ currencies. Dooley, Lizondo, and Mathieson (1989) exam-ined the currency composition of foreign exchange reserves, focusing onthe G-5 currencies. Using confidential data, they found that the reserve-currency composition was influenced by each country’s reported exchangerate arrangements, trade flows with reserve-currency countries, and thecurrency in which its debt service payments are denominated. Using publiclyavailable data, Eichengreen and Frankel (1996) showed that the shares ofthe U.S. dollar, the deutsche mark, and the Japanese yen held as foreignexchange reserves can be explained by the output share of the respectivemajor country in the world. Eichengreen (1998) also showed that the shares
368 KAWAI AND AKIYAMA
of the same G-3 currencies held as foreign exchange reserves can be ex-plained by the shares of output and/or trade of the three countries, includinglagged variables of output and trade.
In this section, we demonstrate that our estimated measures of currencyareas are useful information in explaining variations in the shares of G-5currencies held as official foreign exchange reserves. Specifically, we showthat the holdings of foreign exchange reserves can be better explained byusing the ‘‘net currency-area size’’ in addition to the type of variable usedby Eichengreen and Frankel, the ‘‘own-economic size.’’ The net currency-area size is defined as the size of the currency area as calculated in theprevious section and reported in Table II, except that the economic sizeof each of the G-5 countries, called the own-economic size, is subtractedfrom it. Since the net currency-area size is constructed using the regressioncoefficients obtained for each 5-year period, this variable is also measuredas the 5-year average. Accordingly, we use data for 5-year averages of eachvariable and pool the observations of G-5 countries in a single regressionequation, with the number of observations in each equation totaling 25.As the own-economic size variables, we use the economic shares of theG-5 countries in the world, measured in terms of GDP or total trade flows(exports plus imports).31
The results of the regression analyses are summarized in Tables IVa andIVb.32 Table IVa reports the results when the shares of G-5 currencies heldas foreign exchange reserves are explained only by the own-economic sizeas in Eichengreen and Frankel (1996) and Eichengreen (1997). When onlyone own-economic size variable is used as an explanatory variable in addi-tion to the constant term (Table IVa), the own-economic size based onGDP produces the best result for all three groups of countries and the trade-based variable also produces a reasonable result with a highly significantcoefficient. When two own-economic size variables, GDP-based and trade-based, are used simultaneously, the explanatory power of regression im-proves for all three groups of countries. The magnitudes of the estimated
31 We have decided not to include the SDR or the ECU as foreign exchange reserves inthe regression equation because of the difficulty of defining their own-economic size variables.
32 The IMF publishes annual data for the shares of several industrial countries’ currenciesheld as foreign exchange reserves by the central banks of three groups of countries, namely,industrial countries, developing countries, and all countries (world total). The data are obtainedfrom IMF, International Financial Statistics, Supplement on International Reserves, SupplementSeries No. 6 (1983); International Financial Statistics, Supplement on International Liquidity,Supplement Series No. 14 (1987); and Annual Report, various issues. The share of the U.S.dollar as foreign exchange reserves declined appreciably in 1979 when the IMF introduceddata for the holdings of the ECU as a new item of foreign exchange reserves. We thereforetried to see if the new classification might make any difference in explaining the behavior offoreign exchange reserves by including a dummy variable in the regression equation to accountfor this change. The dummy variable, however, is never significant in any of the specificationswe have tried. Tables Va and Vb therefore report results which do not include the ECU dummy.
EXCHANGE RATE ARRANGEMENTS 369
TABLE IVaThe Effects of the Own-Economic Size on the Holdings of Foreign Exchange Reserves:
Pooled Regressions for G-5 Currencies(Averages for 5-year Periods)
Industrial DevelopingExplanatory variables World countries countries
Constant 210.842** 211.962** 28.661**(2.591) (2.879) (2.731)
Own-economic size (GDP) 2.138** 2.174** 2.042**(0.160) (0.178) (0.169)
R2-Adjusted 0.881 0.861 0.858Nobs 25 25 25
Constant243.332** 244.469** 240.721**
(6.908) (7.581) (6.539)Own-economic size (trade)
6.255** 6.304** 6.082**(0.688) (0.755) (0.651)
R2-Adjusted0.773 0.741 0.782
Nobs 25 25 25Constant
223.224** 223.271** 222.979**(5.874) (6.779) (6.038)Own-economic size (GDP)1.571** 1.656** 1.386**
(0.286) (0.331) (0.294)Own-economic size (trade)2.055* 1.877(#) 2.377*
(0.892) (1.029) (0.916)R2-Adjusted0.900 0.874 0.887Nobs
25 25 25
Note. The numbers in parentheses are the estimated standard errors. Statistical significanceis indicated by ** (1% level), * (5% level), and (#) (10% level). The own-economic size ismeasured by using either nominal GDP or total trade flows (exports plus imports) in currentU.S. dollars.
coefficients on the own-economic size are reasonable and not very differentfrom those estimated by Eichengreen, who used time-series data.33 Forexample, the coefficient on the GDP-based, own-economic size variable isin the 2.0 to 2.2 range when included as the only explanatory variable, andin the 1.4 to 1.7 range when included in combination with the trade-based,own-economic size variable. The trade-based, own-economic size variableyields a coefficient ranging between 1.9 and 2.4, which is larger than thatof the GDP-based variable.
We next add the net currency-area size variable in the right-hand side
33 Eichengreen points out that differences in own-economic sizes across countries do notfully explain disproportionately large holdings of the U.S. dollar and that a historical factormust be taken into account in the regression equation for the U.S. dollar. Eichengreentherefore chooses to include the lagged dependent variable to explain the effects of history.
370 KAWAI AND AKIYAMA
of the pooled regression equation as another factor affecting the currencycompositions of foreign exchange reserves. With this specification (TableIVb), better results are produced in terms of explanatory power. For boththe group of all countries (world) and the group of industrial countries, thebest result is obtained when the GDP-based own-economic size is used to-gether with the GDP-based net currency-area size as explanatory variables.For the group of developing countries, the best result is obtained when thetrade-based own-economic size is used along with the GDP-based net cur-rency-area size, or the GDP-based own-economic size is added to these twovariables. With the net currency-area size included, the coefficient on the own-economic size becomes smaller than without it. In all regression equations, theestimated coefficients on the net currency-area size, though smaller than thoseon the own-economic size, are always statistically significant.
VI. CONCLUDING REMARKS
This paper has examined the exchange rate arrangements adopted byindividual countries in the world. In order to assess the changing roles ofthe major currencies as nominal anchors for exchange rate stabilization,the paper has compiled information on reported exchange rate arrange-ments and has examined patterns of exchange rate volatility and estimatedregression coefficients.
Several important findings are summarized as follows. First, the industri-alized countries and the developing economies adopt different exchangerate regimes. In the industrialized world, the U.S. dollar is not a primarytarget currency for exchange rate stabilization, except in Canada and, tosome extent, Australia and New Zealand. Many countries in Western Eu-rope choose the deutsche mark, the French franc, and the ECU as theirnominal anchor currencies. In the developing world, the U.S. dollar is thefavorite nominal anchor, though significant diversity exists across regions.Africa includes rigid exchange-rate peggers as well as wild exchange-ratefloaters. Its major nominal anchor currencies are the French franc, the U.S.dollar, and the SDR. Asian economies generally attempt to stabilize theirexchange rates vis-a-vis the U.S. dollar, the SDR, and a few regional curren-cies. The Japanese yen has not played a major role as an important nominalanchor even in East Asia. Developing Europe does not experience stableexchange rates; the U.S. dollar, major Western European currencies, or abasket of these serve as loose nominal anchors for this region. The MiddleEast includes countries that successfully stabilize their exchange rates vis-a-vis the U.S. dollar and the SDR. It is one of the most stable regions in theworld in terms of exchange rate movements. The whole of Latin America isa de facto U.S. dollar area since even countries that do not explicitly pegtheir exchange rates to the U.S. dollar do assign significantly positive, andclose to unitary, weights to the dollar.
TABLE IVbThe Effects of the Own-Economic Size and the Net Currency-Area Size on the Holdings
of Foreign Exchange Reserves: Pooled Regressions for the G-5 Currencies(Averages for 5-year Periods)
Industrial DevelopingExplanatory variables World countries countries
Constant 210.090** 216.984** 20.478(1.715) (2.739) (1.826)
Own-economic size (GDP) 1.185** 1.993** 0.582*(0.201) (0.154) (0.213)
Net currency-area size (GDP) 0.662** 0.447** 0.575**(0.119) (0.126) (0.076)
Adjusted R2 0.948 0.908 0.959Number of observations 25 25 25
Constant 217.224* 244.258** 210.053*(7.457) (7.826) (3.730)
Own-economic size (trade) 1.794 6.202** 1.739**(1.070) (0.944) (0.461)
Net currency-area size (GDP) 0.957** 0.047 0.596**(0.203) (0.248) (0.053)
Adjusted R2 0.882 0.730 0.967Number of observations 25 25 25
Constant 212.013** 216.636** 20.003(1.990) (2.964) (1.950)
Own-economic size (GDP) 1.555** 2.119** 0.566*(0.184) (0.155) (0.227)
Net currency-area size (trade) 0.502** 0.319** 0.579**(0.119) (0.109) (0.081)
Adjusted R2 0.931 0.895 0.956Number of observations 25 25 25
Constant 232.484** 245.742** 29.814*(10.680) (7.424) (3.847)
Own-economic size (trade) 4.324* 6.952** 1.755**(1.614) (0.850) (0.472)
Net currency-area size (trade) 0.442 20.290** 0.595**(0.335) (0.192) (0.054)
Adjusted R2 0.780 0.755 0.965Number of observations 25 25 25
Constant 210.159(#) 216.880* 29.579*(5.233) (6.364) (3.629)
Own-economic size (GDP) 1.184** 1.998** 0.323(0.228) (0.314) (0.208)
Own-economic size (trade) 0.011 20.021 1.394*(0.802) (1.130) (0.499)
Net currency-area size (trade) 0.661** 0.448* 0.525**(0.149) (0.161) (0.069)
Adjusted R2 0.946 0.903 0.969Number of observations 25 25 25
(continued)
371
372 KAWAI AND AKIYAMA
TABLE IVb—Continued
Industrial DevelopingExplanatory variables World countries countries
Constant 26.738 213.251 29.499*(7.082) (7.825) (3.787)
Own-economic size (GDP) 1.675** 2.307** 0.295(0.242) (0.431) (0.220)
Own-economic size (trade) 20.920 20.722 1.451*(1.185) (1.541) (0.517)
Net currency-area size (trade) 0.617** 0.385* 0.528**(0.191) (0.179) (0.073)
Adjusted R2 0.930 0.892 0.966Number of observations 25 25 25
Note. The numbers in parentheses are the estimated standard errors. Statistical significanceis indicated by ** (1% level), * (5% level), and (#) (10% level). The net currency-area size isthe difference between the size of currency area as defined in Table V and the own-economicsize, all measured by either nominal GDP or total trade flows (exports plus imports).
Second, we have calculated the economic size, in terms of GDP andtrade flows, of countries under fixed and flexible exchange rate regimesusing estimated values of exchange rate volatility as a demarcation for fixedversus flexible rate regimes. Furthermore, we have compared our measuresof economic size with those that would be obtained using reported exchangerate arrangements. Our measures demonstrate that over the past 25 years,the economic share of countries under fixed rate regimes (with exchangerate volatility less than 0.005 or 0.010) has not declined as dramatically andthe economic share of countries under flexible rate regimes (with volatilitygreater than 0.015 or 0.010) has not risen as dramatically as the measurebased on reported arrangements would indicate. This indicates that changesin observed exchange rate arrangements are gradual.
Third, we have calculated the economic size, in terms of GDP, tradeflows, and financial aggregates, of major currency areas using the estimationresults obtained from exchange rate regressions for all countries in theworld. The regression coefficients on currencies which have been estimatedto be statistically significant and positive are interpreted as the weightsassigned by each country’s authorities to those currencies in exchange ratemanagement. A country’s economy is divided according to these estimatedweights and distributed to the corresponding currency areas. We havecalculated the size of currency areas formed by the G-5 countries, the SDR,and the ECU for each 5-year period and examined how they have evolvedover time. Our calculations suggest that, despite its declining trend, theU.S. dollar area continues to be large because many developing economies,particularly those in Asia and Latin America, regard the dollar as the most
EXCHANGE RATE ARRANGEMENTS 373
important global anchor currency. The Western European currency area,despite its rising trend, is still substantially smaller than the U.S. dollararea, except when measured by trade flows. This suggests that the U.S.dollar will continue to play a key currency role. The Japanese yen hasplayed a far less significant role globally and seems destined to do so unlessa substantial structural break occurs in Asia.
Fourth, following the same method as above, we have computed theeconomic size of the prospective euro area, the U.S. dollar area, and theJapanese yen area, based on the regression results for the 1990s. Using GDPas a measure in calculating economic size, the case of EMU-15 indicates thatabout 46% of the world economy is in the U.S. dollar area, 35% in the euroarea, and 17.5% in the Japanese yen area. The strength of the U.S. dollarlies in the fact that the dollar area is far larger than the size of the UnitedStates itself, which is 27.5%; many developing countries regard the U.S.dollar as the most important nominal anchor. In particular, a substantialpart of the Asian and Western Hemisphere economies belong to the U.S.dollar area. The euro area is bigger than the size of the European Unionby about 3 percentage points. The Japanese yen area is only marginallylarger than the relative share of the Japanese economy. If trade flowsare the fundamental factors determining currency dominance, the resultssuggest a rise in the euro’s role. If these fundamentals are based on capitalmarket measures, the results suggest a much slower rise for the euro. Thetruth seems to lie somewhere in between.
Finally, we have investigated econometrically the determinants of thecomposition of G-5 currencies held as foreign exchange reserves. The empir-ical results have revealed that the reserve currency composition can bebetter explained by the constructed measure of the net currency-area aswell as by the own-economic size of the reserve currency country. Thisdemonstrates the importance of each country’s actual exchange rate ar-rangement for the choice of reserve currency holding.
The paper has not made any attempt to explain the causes of cross-country variation in exchange rate arrangements. What is clear is thatregional factors have important bearings on a nation’s choice of exchangerate regime. This choice reflects not only the degree to which a nation iscurrently integrated to global or regional economic powers in terms of itstrade, investment, or finance, but also the nation’s past colonial ties, history,politics, and geographical proximity. Other factors that affect this choicewould be the degree of openness of the economy in question, the tightnessof exchange control, and various domestic macroeconomic considerationssuch as fiscal balances and inflationary pressure. An econometric studythat tests the importance of these factors in the choice of exchange ratearrangements would be needed in order to enhance our understanding ofthe evolution of the international monetary system.
374 KAWAI AND AKIYAMAA
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rgen
tina
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91.0
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0130
32U
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DM
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0/84
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amas
;The
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70.0
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001.
000
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ivia
IF85
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98.0
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0.00
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CU
0.00
3636
0.98
80/
83B
razi
lA
F70
.01
IF90
.04
MF
94.0
7U
SD0.
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11U
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JY0.
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hile
AF
82.1
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F97
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)U
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0154
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JY*
0.01
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90.
134
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ombi
aA
F70
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94.0
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SDR
*0.
0113
660.
745
0.49
11/
83C
osta
Ric
aM
F82
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MF
95.1
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SD0.
0106
56U
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FF
0.01
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omin
ica
USD
76.0
7U
SD##
#0.
0000
00U
SD**
0.00
0000
1.00
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84D
omin
ican
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ublic
MF
88.0
2U
SD90
.08
IF91
.01
MF
94.0
9U
SD0.
0157
19U
SD**
0.01
5756
1.04
63/
81E
cuad
orM
F89
.03*
USD
92.0
9M
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AF
94.1
2M
F95
.10
USD
0.01
8019
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**0.
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551.
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ador
MF
89.1
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90.0
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82U
SD**
UK
P*
0.00
6926
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nada
n.a.
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tem
ala
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0.02
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651.
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82
(con
tinue
d)
384 KAWAI AND AKIYAMA
AP
PE
ND
IX—
Con
tinue
d
‘‘Rep
orte
d’’
exch
ange
rate
arra
ngem
ent
Exc
hang
era
tevo
lati
lity
Sum
mar
yof
exch
ange
rate
regr
essi
onre
sult
s
Janu
ary
1990
–C
urre
ncy
inth
ere
gres
sion
equa
tion
Std-
res
Janu
ary
1990
–Dec
embe
r19
96(a
ndJa
n.19
97–)
Dec
embe
r19
96th
ees
tim
ated
coef
ficie
nts
excl
/inc
l
Guy
ana
USD
87.0
3IF
91.0
2U
SD0.
0135
97U
SD**
DM
**0.
0130
380.
871
0.47
54/
80H
aiti
USD
70.0
1IF
91.0
9U
SD0.
0282
29U
SD**
0.02
8380
0.95
75/
79H
ondu
ras
USD
70.0
1M
F90
.03
IF92
.02
MF
94.0
6U
SD0.
0164
99U
SD**
0.01
6502
0.94
14/
80Ja
mai
caU
SD89
.11
IF90
.09
USD
0.03
1780
USD
**0.
0317
710.
882
3/81
Mex
ico
MF
82.1
2IF
94.1
2U
SD0.
0163
14U
SD**
JY0.
0162
781.
006
4/80
Net
herl
ands
Ant
illes
USD
70.0
1U
SD##
#0.
0000
00U
SD**
0.00
0000
1.00
00/
84N
icar
agua
USD
70.0
1M
F90
.05
USD
91.0
3M
F93
.01
USD
0.01
5065
USD
**D
MU
KP
0.01
4301
AF
93.0
9*(M
F97
.03*
)0.
776
16/6
8P
anam
aU
SD70
.01
USD
###
0.00
0000
USD
**0.
0000
001.
000
0/84
Par
agua
yIF
89.0
3U
SD0.
0118
82U
SD**
0.01
1931
1.02
50/
84P
eru
USD
87.0
8IF
90.0
8U
SD0.
0216
08U
SD**
UK
PJY
0.02
1367
0.98
616
/68
St.K
itts
and
Nev
isU
SD76
.07
USD
###
0.00
0000
USD
**0.
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001.
000
0/84
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ucia
USD
76.0
7U
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#0.
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00U
SD**
0.00
0000
1.00
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84S.
Vin
cent
&U
SD76
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USD
###
0.00
0000
USD
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rena
dine
s1.
000
0/84
Suri
nam
eU
SD70
.01
MF
94.0
7IF
94.1
0M
F95
.07
USD
0.01
1718
USD
**0.
0117
851.
015
5/79
EXCHANGE RATE ARRANGEMENTS 385T
rini
dad
&T
obag
oU
SD76
.05
IF93
.04
USD
#0.
0047
82U
SD**
FF
0.00
4733
1.03
01/
83U
rugu
ayIF
83.0
3M
F92
.06*
USD
0.01
6728
USD
**D
M0.
0165
791.
049
0/84
Ven
ezue
laIF
89.0
3M
F93
.06*
USD
94.0
7M
F96
.04
USD
0.01
8171
USD
**F
FJY
0.01
7970
0.99
06/
78
Not
e.‘‘R
epor
ted’
’E
xcha
nge
Rat
eA
rran
gem
ents
:(1
)‘‘R
epor
ted’
’ex
chan
gera
tear
rang
emen
tsar
eex
pres
sed
byth
efo
llow
ing
nota
tion
s:U
SD5
pegg
edto
the
U.S
.do
llar;
FF
5pe
gged
toth
eF
renc
hfr
anc;
DM
5pe
gged
toth
ede
utsc
hem
ark;
AD
5pe
gged
toth
eA
ustr
alia
ndo
llar;
IR5
pegg
edto
the
Indi
anru
pee;
IL5
pegg
edto
the
Ital
ian
lire;
RR
5pe
gged
toth
eR
ussi
anru
ble;
SAR
5pe
gged
toth
eSo
uth
Afr
ican
rand
;SID
5pe
gged
toth
eSi
ngap
ore
dolla
r;SD
R5
pegg
edto
the
SDR
(Spe
cial
Dra
win
gR
ight
s);C
C5
pegg
edto
othe
rcu
rren
cyco
mpo
site
;LS
5fle
xibi
lity
limit
edvi
s-a-
vis
asi
ngle
curr
ency
(the
U.S
.dol
lar)
;CE
A5
coop
erat
ive
exch
ange
arra
ngem
ents
;AF
5ad
just
edac
cord
ing
toa
set
ofin
dica
tors
;MF
5m
anag
edflo
atin
g;IF
5in
depe
nden
tly
float
ing.
(2)
The
num
bers
follo
win
gth
eab
ove
nota
tion
sin
dica
teth
em
onth
orqu
arte
rw
hen
ach
ange
inex
chan
gera
tear
rang
emen
tsis
effe
ctiv
e.E
xcha
nge
Rat
eV
olat
ility
:(3
)T
heta
ble
show
sth
ena
me
ofth
ecu
rren
cyw
hich
yiel
dsth
esm
alle
stex
chan
gera
tevo
lati
lity
vis-
a-vi
sth
eco
untr
y’s
curr
ency
and
its
mag
nitu
de.
(4)
Tri
ple
poun
ds(#
##),
doub
lepo
unds
(##)
,and
asi
ngle
poun
d(#
)re
spec
tive
lyin
dica
teth
atvo
lati
lity
isle
ssth
an0.
0001
,les
sth
an0.
001,
and
less
than
0.01
.(5
)W
hen
calc
ulat
ing
exch
ange
rate
vola
tilit
y,da
taob
serv
atio
ns(l
ogfir
stdi
ffer
ence
sof
the
coun
try’
sno
min
alex
chan
gera
te)
whi
chha
veva
lues
grea
ter
than
0.01
are
dele
ted
from
the
sam
ple.
(6)
The
nam
esof
curr
enci
esar
ein
dica
ted
byth
efo
llow
ing
nota
tion
s:U
SD5
U.S
.do
llar;
DM
5de
utsc
hem
ark;
FF
5F
renc
hfr
anc;
JY5
Japa
nese
yen;
UK
P5
UK
poun
dst
erlin
g;E
CU
5E
urop
ean
Cur
renc
yU
nit
ofth
eE
MS;
SDR
5Sp
ecia
lD
raw
ing
Rig
hts
ofth
eIM
F;
AD
5A
ustr
alia
ndo
llar;
IR5
Indi
anru
pee;
NZ
D5
New
Zea
land
dolla
r;P
E5
Por
tugu
ese
escu
do;S
AR
5So
uth
Afr
ican
rand
;SID
5Si
ngap
ore
dolla
r;SP
5Sp
anis
hpe
seta
.(7
)A
hyph
en(-
)in
dica
tes
that
noex
chan
gera
teda
taar
eav
aila
ble.
Sum
mar
yof
Exc
hang
eR
ate
Reg
ress
ions
:(8
)T
hesu
mm
ary
show
sth
ere
sult
sof
regr
essi
ones
tim
atio
n,w
here
the
log
first
diff
eren
cein
aco
untr
y’s
nom
inal
exch
ange
rate
(mea
sure
dvi
s-a-
vis
the
Swis
sfr
anc)
isre
gres
sed
onth
elo
gfir
stdi
ffer
ence
sin
the
nom
inal
exch
ange
rate
sof
the
U.S
.dol
lar,
the
deut
sche
mar
k,th
eF
renc
hfr
anc,
the
Japa
nese
yen,
the
UK
poun
dst
erlin
g,th
eSD
R,a
ndth
eE
CU
asw
ell
asot
her
rele
vant
curr
enci
es(a
llm
easu
red
vis-
a-vi
sth
eSw
iss
fran
c).T
hech
oice
ofre
leva
ntcu
rren
cies
depe
nds
onec
onom
ic,h
isto
rica
l,co
loni
al,a
ndge
ogra
phic
alco
nsid
erat
ions
.(9
)T
hefo
llow
ing
abbr
evia
tion
sin
dica
teth
ena
mes
ofcu
rren
cies
used
for
regr
essi
on:
USD
5U
.S.
dolla
r;D
M5
deut
sche
mar
k;F
F5
Fre
nch
fran
c;U
KP
5U
Kpo
und
ster
ling;
JY5
Japa
nese
yen;
EC
U5
Eur
opea
ncu
rren
cyun
it;
SDR
5sp
ecia
ldr
awin
gri
ghts
;A
D5
Aus
tral
ian
dolla
r;IR
5In
dian
rupe
e;N
ZD
5N
ewZ
eala
nddo
llar;
PE
5P
ortu
gues
ees
cudo
;SA
F5
Sout
hA
fric
anra
nd;S
ID5
Sing
apor
edo
llar;
SP5
Span
ish
pese
ta.
(10)
Whe
nes
tim
atin
gre
gres
sion
equa
tion
s,th
ose
data
obse
rvat
ions
that
have
valu
esgr
eate
rth
an0.
01fo
rth
ele
ft-h
and
–sid
eva
riab
le(t
helo
gfir
stdi
ffer
ence
ina
coun
try’
sno
min
alex
chan
gera
te)
are
dele
ted
from
the
sam
ple.
The
nota
tion
s‘‘e
xcl’’
and
‘‘inc
l’’re
spec
tive
lyin
dica
teth
enu
mbe
rsof
obse
rvat
ions
excl
uded
and
incl
uded
.(1
1)F
orea
chco
untr
y,a
regr
essi
oneq
uati
onw
ith
the
high
est
expl
anat
ory
pow
er,
mea
sure
dby
the
adju
sted
R2
and
reas
onab
leco
effic
ient
esti
mat
es,
isch
osen
and
repo
rted
.In
part
icul
ar,t
hebe
stre
gres
sion
equa
tion
sar
ech
osen
soth
atth
ees
tim
ated
coef
ficie
nts
are
alw
ays
nonn
egat
ive
and
stat
isti
cally
sign
ifica
ntat
the
10%
leve
l.(1
2)D
oubl
eas
teri
sks
(**)
,asi
ngle
aste
risk
(*),
and
noas
teri
skin
dica
tere
spec
tive
lyth
atth
eco
effic
ient
sar
esi
gnifi
cant
atth
e1%
,5%
,and
10%
leve
ls.I
fth
eco
effic
ient
issi
gnifi
cant
atth
e10
%le
vel,
only
the
nam
eof
the
curr
ency
islis
ted
wit
hout
show
ing
the
esti
mat
edco
effic
ient
.(1
3)A
hyph
en(-
)in
dica
tes
that
the
num
ber
ofda
taob
serv
atio
nsis
too
smal
lto
esti
mat
ea
mea
ning
ful
regr
essi
oneq
uati
on.
Sour
ce.
Inte
rnat
iona
lM
onet
ary
Fun
d,In
tern
atio
nal
Fin
anci
alSt
atis
tics,
vari
ous
issu
es.
386 KAWAI AND AKIYAMA
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