On the choice of optimal central bank currency baskets

Abstract

The use of currency baskets as the basis for central bank exchange rate decisions has spread in the late 1970's. The analytical problems encountered when choosing weights for such baskets have to some extent been studied). In practice, bilateral trade weights are frequently used. It can be argued, that invoicing currency weights should be used instead since they measure actual weights in the currency markets. On the other hand, using only invoicing currencies may be excessively restricted since foreign capital transactions and transmission effects are ignored.