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Economic numéraire in SI units
avoiding the effect of currency exchange rate volatility
Ian McFarlane
School of Agriculture, Policy and Development
University of Reading, UK
Methods for stabilising
intraregional 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 and
commodity 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 data
World 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-based
currency 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-based
currency 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-based
currency numéraire
80 kWh
equivalent to
288 MJ
9 litres petrol
1/20 barrel of oil
10 kg coal
7.5 m3 natural gas
Food component
(kg/cap/day for 10.97 MJ)
year
Wheat Maize Rice
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0.209
0.211
0.211
0.209
0.200
0.209
0.205
0.199
0.194
0.205
0.204
Edible
oil
0.021
0.022
0.022
0.023
0.023
0.022
0.023
0.024
0.024
0.023
0.024
0.216
0.213
0.220
0.220
0.230
0.241
0.234
0.233
0.250
0.248
0.245
0.217
0.216
0.214
0.207
0.208
0.201
0.208
0.211
0.208
0.206
0.203
Sugar Beef
meat
0.016 0.021
0.011 0.021
0.009 0.021
0.010 0.022
0.009 0.021
0.008 0.020
0.009 0.020
0.010 0.021
0.008 0.021
0.008 0.019
0.008 0.020
Pig
meat
0.032
0.032
0.033
0.034
0.034
0.032
0.032
0.033
0.032
0.031
0.032
Tubers Citrus
0.239
0.252
0.246
0.253
0.249
0.243
0.239
0.233
0.227
0.221
0.226
0.037
0.038
0.038
0.039
0.038
0.037
0.036
0.038
0.037
0.037
0.037
Food component cost (US cents/c/d)
Energy component
year
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Oil
112.3
110.8
110.5
109.6
108.1
107.3
105.7
104.2
102.8
100.8
100.1
Gas
66.8
67.7
68.4
68.9
68.8
67.9
68.1
67.9
68.7
69.2
68.4
(288 MJ/cap/day)
Coal
71.7
72.7
72.5
72.9
76.1
77.5
79.2
80.8
82.4
83.6
84.6
Hydro
18.9
18.7
18.1
18.1
17.5
17.8
17.9
18.2
18.0
18.6
19.1
Nuclear
18.2
18.2
18.5
18.5
17.5
17.5
17.1
16.9
16.1
15.8
15.7
Energy component cost
(US$/c/d)
SI commodity based unit of value
Days of subsistence affordable per unit of fiat currency
References
Clements K., Fry R. (2008) Commodity currencies and currency commodities.
Resources Policy 33, 55-73
Cooper R.N. (1999) Exchange rate choices. Federal Reserve Bank of Boston.
http://www.bostonfed.org/economic/conf/conf43/99p.pdf
Crucini 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), 48-60
FAO (2011) World calories - total. http://www.fao.org/economic/ess/chartroom-andfactoids/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.osakau.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.pdf
Mackay 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