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A stable aggregate currency revisited: Highlighting some fundamental issues

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  • Kunkler, Michael

Abstract

A multicurrency numéraire is a weighted basket of currencies, where the weights sum to zero and all weights are positive. A stable aggregate currency is an optimal multicurrency numéraire, which is estimated using a minimum-variance portfolio optimisation. The variables of the portfolio optimisation are invariant currency indexes, which are multilateral exchange rates and are priced in terms of an equally-weighted basket of the currencies. This paper shows that there are some fundamental issues with the concept of a stable aggregate currency. Once these issues have been resolved, it is shown that the portfolio optimisation problem is infeasible.

Suggested Citation

  • Kunkler, Michael, 2023. "A stable aggregate currency revisited: Highlighting some fundamental issues," Economics Letters, Elsevier, vol. 231(C).
    • Handle: RePEc:eee:ecolet:v:231:y:2023:i:c:s0165176523002926
    DOI: 10.1016/j.econlet.2023.111267
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    References listed on IDEAS

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    1. Kunkler, Michael & MacDonald, Ronald, 2015. "Half-lives of currencies and aggregation bias," Economics Letters, Elsevier, vol. 135(C), pages 58-60.
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    3. Victor Pontines, 2009. "Optimal common currency basket in East Asia," Applied Economics Letters, Taylor & Francis Journals, vol. 16(11), pages 1139-1141.
    4. Giudici, Paolo & Leach, Thomas & Pagnottoni, Paolo, 2022. "Libra or Librae? Basket based stablecoins to mitigate foreign exchange volatility spillovers," Finance Research Letters, Elsevier, vol. 44(C).
    5. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
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    More about this item

    Keywords

    Exchange rates; Stable aggregate currency;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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