The Basket-peg System in Exchange Rate Policy: Some Implications and Applications
Introduction
Following the floating of the major currencies in March 1973, the Nordic countries – Finland, Norway and Sweden – gradually adopted a system of pegging their currencies adjustably to a basket of other currencies. By adjustability is meant that the authorities sometimes change the value of the home currency vis-à-vis the basket by a discrete decision. Under this system, such a change is defined as a de- or revaluation of the home currency.
The respective weights of the foreign currencies in the baskets used for determining the exchange rates are based principally on relative trade shares, although the weight structures have undergone certain revisions on a few occasions. The most recent major change was the exclusion of the Soviet rouble from the Finnish basket as from the beginning of 1984. Prior to this the rouble had had a weight of almost 25 per cent (see Oksanen, 1984a and 1984b).
Table 1 shows the weight structures as they stood in the spring of 1984. As can be seen, the number of currencies included in each basket varies between 12 and 15. The table also reveals the important fact that the Nordic currencies are partially interlinked, since each currency is included in the baskets of the others. The largest bilateral weight is the 20 per cent of the SEK in the basket of the FIM.
The purpose of this paper is to consider two separate normative questions related to the basket-peg system. First, we discuss certain properties of the basket-peg system which serve as a useful guide for some operations related to the foreign exchange risk management of individual firms. Second, we discuss the question of the currency baskets which are most stable vis-à-vis goods transacted in world markets. This question is not only related to foreign exchange management in individual firms, but is also one approach among others to the normative question of the composition of the currency baskets which the Nordic authorities should apply in their system of basket-pegging.
- ISSN: 0357-9603
- ISBN: 951-9281-44-4
