How did the dollar peg fail in Asia?

In this paper, we have constructed a theoretical model in which the Asian f irm maximizes its profit, competing with the Japanese and the U.S. firms in their markets. The duopoly model is used to determine export prices and vo lumes in response to the exchange rate fluctuations vis-a-vis the Japanese yen and the U.S. dollar. Then, the optimal basket weight that would minimiz e the fluctuation of the growth rate of trade balance was derived. These ar e the navel features of our model. The export price equation and export vol ume equation are estimated for several Asian countries for the sample perio d from 1981 to 1996. Results are generally reasonable. The optimal currency weights for the yen and the U.S. dollar are derived and compared with actu al weights that had been adopted before the currency crisis of 1997. For al l countries in the sample, it is shown that the optimal weight of the yen i s significantly higher than the actual weight. (C) 1998 Academic Press.