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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Optimal Currency Basket in a World of Generalized Floating an Application to the Nordic Countries
Hali J. Edison and Erling Vardal
1985-266  (October 1985)

Abstract:  The purpose of this paper is to derive optimal weights for a currency basket taking into consideration the objective of the policymaker. We carefully distinguish between the two terms: effective exchange rate index and currency basket, which are often used interchangeably in the literature. In general, our analysis is an extension of the work of Branson-Katseli and Lipschitz-Sundararajan and then applied to the Nordic countries. We use the policy objective of minimizing fluctuation in export production and illustrate our results using Norway, Sweden and Finland. The weights we derive create optimal currency baskets which are different from the ones used in the countries.

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