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Optimal Currency Basket Estimation

2026

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This paper proposes a novel framework for estimating optimal currency basket weights that minimizes imported inflation volatility, crucial for central banks' price stability mandates.

* Presents a minimum-variance framework analogous to Markowitz portfolio theory for currency basket design.
* Applies the model to Fiji, demonstrating a significant reduction in imported inflation variance.
* Discusses the limitations of traditional trade-weighted schemes and suggests avenues for future research.

currency basket, exchange rate pass-through, minimum-variance portfolio, small open economies, monetary policy

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