Economic numéraire in SI units avoiding the effect of currency exchange rate volatility

Ian McFarlaneSchool of Agriculture, Policy and Development

University of Reading, UK

Methods for stabilisingintraregional exchange rates

Kawai (2008): emergence in East Asia of macroeconomic and structural convergence- acknowledged as a necessary condition for common currency, first identified by Mundell in 1961

Hsu (2008): feasibility of a common currency for Hong Kong, Korea, Malaysia, Philippines, Singapore and Thailand

Soo and Chung (2010): re-investigated the behaviour of these six economies, concluding that segmentation had declined significantly

Numériare for value of a regional currency

An international currency unit already exists,The World Bank Special Drawing Right (SDR)

The SDR is defined in terms of a weighted basket of four existing currencies:- US Dollar- EU Euro- Japanese Yen- British Pound

Numériare for value of a regional currency

An alternative is to use a weighted basket of goods,to represent real purchasing power

Exchange rates andcommodity prices

countries that are considered to have ‘commodity currencies' include Australia, New Zealand and Canada as well as some East Asia countries that are rich in natural resources

Clements and Fry (2008) found that spillovers from commodities to currencies contributed less than 1% to the volatility of currencies, while spillovers from currencies to commodities contributed between 2 and 5.2% to commodity price volatility

Relative volatility:[as deviation from expected value of 1961 – 2008 annual mean data]

Commodity data

World cereal production (Mt/year):

Commodity dataWorld food prices (US$/tonne, deflated) are more volatile than would be expected from normal market forces:

Currency volatility

Volatility of annual mean exchange rates against US$ for 1971 - 2009:

Currency volatility

The volatility of aggregate real exchange rates exceeds what economists believe to be consistent with a plausible degree of price rigidity (Crucini et al, 2010)

Richard Cooper (1999) foresaw that as international financial transactions continue to grow, financial factors will come to dominate exchange rate determination

Flexible rates, hitherto providing a useful mechanism for absorbing trade shocks and disturbances, themselves become a source of financial shocks

Commodity basket as numériare for purchasing power

Agricultural commodities are by their nature entirely replaceable, and agricultural economists can predict the marginal cost of producing approximately sufficient of each commodity to satisfy the market in the short term

Agricultural commodity supply in the long run is infinitely elastic

Commodity-basedcurrency numéraire

FAO estimated 2620 food calories (10.97 MJ) per capita per day to be actual world food energy consumption in 2009 (FAO, 2011)

For our numéraire, a basket of food commodities is defined, and used to convert the requirement for 10.97 MJ/cap/d to monetary units

We add a second component, representing the cost of actual energy usage

Commodity-basedcurrency numéraire

Mackay (2009), ‘Sustainable Energy – without the hot air’, showed that average UK energy consumption is

125 kWh/cap/d- with feasible efficiency savings, a western lifestyle requires

80 kWh/cap/d

Commodity-basedcurrency numéraire

80 kWh equivalent to

288 MJ9 litres petrol1/20 barrel of oil10 kg coal7.5 m3 natural gas

Food component (kg/cap/day for 10.97 MJ)

year Wheat Maize Rice Edible oil

Sugar Beef meat

Pig meat

Tubers Citrus

1999 0.209 0.216 0.217 0.021 0.016 0.021 0.032 0.239 0.037 2000 0.211 0.213 0.216 0.022 0.011 0.021 0.032 0.252 0.038 2001 0.211 0.220 0.214 0.022 0.009 0.021 0.033 0.246 0.038 2002 0.209 0.220 0.207 0.023 0.010 0.022 0.034 0.253 0.039 2003 0.200 0.230 0.208 0.023 0.009 0.021 0.034 0.249 0.038 2004 0.209 0.241 0.201 0.022 0.008 0.020 0.032 0.243 0.037 2005 0.205 0.234 0.208 0.023 0.009 0.020 0.032 0.239 0.036 2006 0.199 0.233 0.211 0.024 0.010 0.021 0.033 0.233 0.038 2007 0.194 0.250 0.208 0.024 0.008 0.021 0.032 0.227 0.037 2008 0.205 0.248 0.206 0.023 0.008 0.019 0.031 0.221 0.037 2009 0.204 0.245 0.203 0.024 0.008 0.020 0.032 0.226 0.037

Food component cost (US cents/c/d)

Energy component (288 MJ/cap/day)

year Oil Gas Coal Hydro Nuclear 1999 112.3 66.8 71.7 18.9 18.2 2000 110.8 67.7 72.7 18.7 18.2 2001 110.5 68.4 72.5 18.1 18.5 2002 109.6 68.9 72.9 18.1 18.5 2003 108.1 68.8 76.1 17.5 17.5 2004 107.3 67.9 77.5 17.8 17.5 2005 105.7 68.1 79.2 17.9 17.1 2006 104.2 67.9 80.8 18.2 16.9 2007 102.8 68.7 82.4 18.0 16.1 2008 100.8 69.2 83.6 18.6 15.8 2009 100.1 68.4 84.6 19.1 15.7

Energy component cost (US$/c/d)

SI commodity based unit of valueDays of subsistence affordable per unit of fiat currency

References

Clements K., Fry R. (2008) Commodity currencies and currency commodities. Resources Policy 33, 55-73Cooper R.N. (1999) Exchange rate choices. Federal Reserve Bank of Boston. http://www.bostonfed.org/economic/conf/conf43/99p.pdfCrucini M., Shintani M., Takayuki T. (2010) Accounting for persistence and volatility of good-level real exchange rates: The role of sticky information. J Int Economics 81(1), 48-60FAO (2011) World calories - total. http://www.fao.org/economic/ess/chartroom-and-factoids/chartroom/93-world-calories-total/en/ . Hsu H. (2008) Is a common currency area feasible for East Asia? A multivariate structural VAR approach. http://www.osipp.osaka-u.ac.jp/archives/DP/2009/DP2009E006.pdf . Kawai M. (2008) The Role of an Asian Currency Unit for Asian Monetary Integration. Asian Development Bank Institute http://www.obela.org/system/files/Microsoft+Word+-+Masahiro+Kawai.pdfMackay D. (2009) Sustainable energy - without the hot air. UIT, Cambridge, UK. ISBN 978-0-9544529-3-3 and 978-1-906860-01-1.Soo S-C., Choong C-K. (2010) An emergence of a Common Currency Area in the selected East Asian economies: a revisit. Singapore Econ Review 55(2), 353-376