The role of nominal anchor currencies in exchange rate arrangements

This paper studies the evolution of exchange rate arrangements of almost al l countries in the world over the period 1970-1996. It examines both offici ally reported and empirically observed exchange rate arrangements. Several findings are obtained. First, the relative economic size of countries under fixed exchange rate regimes has not declined as dramatically as the measur e based on reported arrangements would indicate. Second, the U.S. dollar ha s been the most dominant, global anchor currency because many developing ec onomies, particularly those in Asia, Latin America, and the Middle East, ha ve attempted to stabilize their exchange rates to the dollar. Third, the re serve currency composition is determined by the constructed measure of the net currency-area size in addition to the own-economic size of the reserve currency country. Fourth, as a result of the transition to the final stage of EMU, the euro is expected to emerge as the world's second most dominant anchor currency. While the Japanese yen will continue to play a less signif icant role as nominal anchor, its role in East Asia is expected to rise gra dually. (C) 1998 Academic Press.