East Asian Currency Union

Abstract

A currency union has been suggested for East Asia. The chapter analyzes the feasibility of various types of unions, such as a dollar bloc, euro bloc, yen bloc, and basket currency and assess the welfare effects for East Asian economies. Judging from optimum currency area (OCA) criteria, including the symmetry of output and price shocks across countries, commitment to price stability, and trade and financial integration, East Asia does not have highly favorable economic conditions for a currency union, particularly when compared to the euro area. The low political proximity between Japan and other East Asian economies impedes Japan’s leadership in the creation of an East Asian currency union. For most countries in East Asia, a currency union involving a broad group of economies would result in a net welfare gain due to trade creation. However, if the increased volatility due to the loss of monetary policy independence generates a significantly negative effect on growth, the larger East Asian economies such as the People’s Republic of China (PRC), Indonesia, and Japan may suffer a net welfare loss. A substantial welfare gain from joining an East Asian currency union would occur if a currency union lowers the probability and size of disasters such as wars and financial crises in East Asia.

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