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An Asian Currency Unit: Simulations for Its Effects on East Asia

Authors


  • I would like to thank Masahiro Kawai, Mario Lamberte, Willem Thorbecke, Hiroyuki Ito, Peter Morgan, Gloria Pasadilla, Yuqing Xing at the seminar of Asian Development Bank Institute on 3 October 2010, Fai-nan Perng and Yen-dar Den at the Central Bank of the Republic of China (Taiwan), and two anonymous referees for helpful comments and suggestions. All errors are mine.

Abstract

An Asian currency unit (ACU) is necessary to deepen Asian financial markets and to convert national currencies into a single monetary policy. However, the experiences of the European Currency Unit and the European Exchange Rate Mechanism crisis in 1992–93 have indicated the danger of the so-called gradual approach. This study evaluates the effects of welfare should the ACU indicator become a long-term constraint of the People's Republic of China and Japan, the big two in East Asia. Our results indicate that the constraints of countries’ own baskets (e.g. real effective exchange rates) are still better before the launch of a true single currency. That is, pegging to an ACU indicator could hardly be sustained in the long-run if East Asian countries have not reached a consensus about a regional monetary union.

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