Optimal Currency Basket Estimation / Etienne Vaccaro-Grange.

Format:

Book

Government document

Author/Creator:

Vaccaro-Grange, Etienne.

Series:

IMF Working Papers; Working Paper ; No. 2026/131

IMF Working Papers

Language:

English

Physical Description:

1 online resource (23 pages)

Place of Publication:

Washington, D.C. : International Monetary Fund, 2026.

Summary:

Small open economies often anchor their exchange rate to a basket of foreign currencies, with weights typically set from trade shares or financial exposure. Such schemes ignore the heterogeneity of pass-through across currencies and the covariance structure of bilateral rates, and therefore do not minimize the volatility of imported inflation, the central bank’s mandate. This paper proposes a minimum-variance framework — formally analogous to a Markowitz portfolio problem in pass-through space — in which basket weights minimize the variance of exchange-rate-driven imported inflation, subject to a constraint that preserves the basket’s cumulative pass-through. Applied to the case of Fiji, an import-intensive island economy with a five-currency basket, the optimization reduces the variance of imported inflation by close to twenty percent, with results robust across alternative specifications.

Notes:

Description based on print version record.

ISBN:

9798229052412