A simulation of the dinar exchange rate linked to a basket of currencies. Partial translation CBI PDF

A simulation of the dinar exchange rate linked to a basket of currencies. Partial translation CBI PDF

11-7-2017

Central Bank of Iraq1
A simulation of the dinar exchange rate linked to a basket of currencies
Dr. Ahmed Abrehi Ali
Introduction:
The stabilization of the national currency by a basket of currencies, which is among the world’s exchange-rate regimes, as well as strict or flexible bilateral linkage. Therefore
It is proposed that the dinar be pegged to a basket of major currencies, international reserve currencies, dominant in foreign trade and capital markets,
United States Dollars. But Iraq has been used to favoring bilateral ties in its monetary history and to this day. It is no secret to the followers of the argument of bilateral linkage and dollars in particular
That the source of foreign currency to Iraq is the dollar first, and secondly the dollar is often in official international reserves and about 65 percent in
Third, Iraq’s foreign trade depends on the dollar’s currency, even with neighboring and Asian countries, and the fourth most countries depend on the dollar to intervene in the market
Exchange is called the intervention currency, and in Iraq also operates the window of the central bank in dollars and so we call the currency of the window.
However, it is necessary to interact with the currency basket proposal and to discover patterns of exchange rate movement under this system.
For those interested and decision-makers to consider the performance of this system and how it differs from the bilateral link.
The exchange rate of the dinar linked to a basket of currencies of varying weights:
In this note, a review of the exchange rate of the Euro, Pound Sterling, Yen and Swiss currency against the Dollar since the beginning of 1999. Then we assumed
The Iraqi dinar was pegged to a basket of currencies according to three alternatives to weights between the first of January 1999, the beginning of the euro, and the beginning of the 10th of 2017.
The weights are:
First: 65% of the dollar; 20% of the euro; and the rest of the currencies 5% each.
Second: 60% for the dollar; 20% for the euro; 10% for the sterling; and 5% for the Swiss and Japanese

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Third: 50% to the dollar; 25% to the euro; 10% to the pound; 7.5% to the Swiss and Japanese.
The exchange rate of the dinar was then calculated according to the linkage of these currencies. For simulations we assumed starting from the beginning of 2012, and points could be selected
Start again and recalculate but this does not affect the pattern of movement up and down. It is important to state the results of the currency basket commitment and its weights in the exchange rate calculation,
And within a period of time sufficient for the occurrence of cyclical changes and fluctuations in the relationship between the major currencies in the world. At the starting point on the first day of the first month
For the year the dollar was 1200 dinars, ie at the moment of transition from the binary system to the basket. The exchange rates of other currencies change in dinars according to their exchange rates
In dollars. The result is shown in the table at the end of this note, which shows how much the exchange rate (JD / $) will be according to the currency basket and their stated weights.
Below is pure experience with the assumption that the exchange rate of another primary is 1700 dinars per dollar.
The proposal to adopt a basket of currencies instead of a bilateral link would mean a change in the dollar exchange rate in dinars according to the exchange rate of the basket currencies against the dollar. How many will be
Change ranges, this is what you find in the table. When pricing the euro or the pound in dinars it depends on the exchange rates between those currencies and dollars, for example:
Dollars per euro are multiplied by dinars per dollar and so on. So that the dealer who turned the dinar into euros and then to the dollar recovers the amount of the dinar
He used it to buy the euro when converting dollars into dinars at the same market moment.
Note that the euro exchange rate with the dollar is cyclical, and generally the trend of the exchange rate of all currencies for reasons related to
Productivity and therefore export prices and balance of payments accordingly. Therefore, adoption of the basket does not guarantee a specific direction for the exchange rate of the dollar, or any
Other currency, in dinars. And when the basket is adopted, it does not require changing the exchange rate daily, but enough per week or monthly.
These accounts and data presentations for clarification, and knowledge of the quantitative scope of the issue under discussion. When you switch to a basket, you need to agree on currencies
Weights and why. The weights assumed in this note are close to the first alternative to the components of Iraq’s international reserves. Relative components can be considered
For foreign trade or others to propose weights.

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Table (1)
Summary of exchange rate simulation results (JDs) when linked to a currency basket
From the assumed time horizon until October 2017

Note: Unable to show chart, go to the pdf link to view.

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Figure (1)
Exchange rate movement between January 2005 and October 2017: Simulating the peg to the basket of currencies

Note: Unable to show chart, go to the pdf link to view.

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Experience has shown that the dinar exchange rate in relation to a basket of major currencies does not move far below average levels of bilateral linkage. The direction can not be determined
Regular rise or fall of the dinar exchange rate with the dollar and for a long time when the currency basket is committed. Also, the oscillation with which, almost, advantages are evident
Installation as long as the window uses one foreign currency. And to the distinguished readers of specialists and others, we present these data and accounts, and can re-experiment with any
Other hypotheses they see fit.

Statistical Appendix
Figure (2)
The exchange rate of the euro to the dollar since the beginning of 2016

Note: Unable to show chart, go to the pdf link to view.

https://cbi.iq/static/uploads/up/file-150962352944489.pdf

This is the first 5 of 20 pages translated, I will do my best to translate the remaining 15 pages, stray tuned.