TY  - JOUR
AU  - Branson,William H.
AU  - Macedo,Jorge Braga de
TI  - The Optimal Weighting of Indicators for a Crawling Peg
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 527
PY  - 1983
Y2  - May 1983
UR  - http://www.nber.org/papers/w0527
L1  - http://www.nber.org/papers/w0527.pdf
N1  - Author contact info:
William H. Branson
Economics Department
341 Wallace Hall
Princeton University
Princeton, NJ  08544-1013
Tel: 609/258-6918
Fax: 609/258-6419
E-Mail: N/A user is deceased

Jorge Braga de Macedo
Universidade Nova de Lisboa
Faculty of Economics
Campus Campolide
1099-032 Lisbon
PORTUGAL
Tel: +351-213630778
Fax: +351-213631460
E-Mail: jbmacedo@fe.unl.pt
AB  - This paper derives optimal weights for current-account and reserve indicators for adjusting the exchange rate (a "crawling peg"). Keven (1975)showed that use of a current account indicator alone would not stabi1iereserves, while a reserve indicator results in unstable fluctuations in the exchange rate. This paper begins by analyzing the problem in the frame work of Phillips (1954), in which the current account indicator is "proportional" and the reserve indicator is "integral." We then analyze the problem in a deterministic optimal control framework, and finally as a problem in stochastic control. In all cases the optimal combination is a weighted average, which we call the Keven-Phillips formula. With a fairly low variance of the current account, its weight falls in the range 0.47-0.65. Rising variance reduces its weight in the optimal formula.
ER  -