The Optimum Currency Basket Approach to East Asia’s Coordinated Exchange Rate Intervention

This paper develops a basis for exchange rate policy coordination for three countries, China, Japan, and Korea. We suggest that in managing the exchange rate, the three countries should establish the common rules for exchange rate intervention and propose that each country should use the optimum basket rate as the target exchange rate. In this paper we propose a basket rate formula for each country and derive the optimum weights for the currencies in the basket. To find the optimum currency weights, we minimize the variance of the percentage changes in the target exchange rate. Through empirical analysis, we get the result that the actual exchange rate of each country tends to fall within a range of plus- minus 3 percent around its target exchange rate.Fukino foundation21 p