On the correct model specification for estimating the structure of a currency basket
Journal
Applied Economics Letters
Journal Volume
22
Journal Issue
10
Pages
783-787
Date Issued
2015
Author(s)
Abstract
A strand of literature has focused on inferring the weights of the anchor currencies in a country’s currency basket. With the growing importance of China’s economy, there has been a surging research interest in the role of the renminbi as an international anchor currency and in China’s de facto exchange rate regime. In this article, we show by a simple model and demonstrate using the observed data on the Special Drawing Rights basket that the correct specification to estimate the weights of anchor currencies in a currency basket is to use the rates of change in exchange rates and to write exchange rates in quantity term. When one is to estimate the structure of a currency basket, close attention should be paid to using the rates of change or the levels of exchange rates as well as writing exchange rates in quantity or price term.
Type
journal article