Intra-regional trade in intermediate goods has become an important feature of trade and production in East Asia. In this article, I consider the implication of this intra-regional trade in intermediate goods to the choice of exchange rate regime for East Asian countries. Towards this end, I build a three-country New Open Economy Macroeconomic model which incorporates intra-regional trade in intermediate goods along with trade in final goods. The simulation results show that, in the presence of intra-regional trade in intermediate goods, in addition to the linkage in consumption (or aggregate demand), there emerges a new and important linkage between East Asian countries: that in production. In general, the optimal choice of exchange rate regime depends on the price setting behavior of firms in domestic and foreign markets. In the most realistic case in which the US dollar is used as the invoicing currency in trade, the optimal exchange rate regime, in terms of trade balance stabilizing, for an East Asian country is a basket peg composed by the US dollar and the Japanese yen in which the weight assigned to the US dollar is dominantly high.
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