Prospects of Monetary Integration in Asia: Adopting the Yuan and Other Options
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This study examines the macroeconomic losses and gains of various types of monetary integration in Asia, including adopting the Chinese yuan as a common currency for 47 Asian economies. Using data from 1979 to 2011, I find that inflation bias and business cycle synchronization with China vary substantially across countries. The estimated losses and gains from the adoption are often positively related, a relationship that appears to have strengthened over time. However, a net gain comparison is feasible for individual countries. In particular, by dividing sample economies into two groups East Asia and Other Asia, the empirical results suggest that Cambodia, Indonesia, Laos, Mongolia, Myanmar, Philippines, and Vietnam are countries that will gain more and lose less from adopting the yuan than the others in my sample, so that they are the most promising candidates. I also investigate gains and losses for these Asian countries of adopting the yen or the U.S. Dollar. I find that the U.S. Dollar is a better choice for Bangladesh, India, Cambodia, Iraq, Israel, Mongolia, Pakistan, Philippines, United Arab Emirates, and Armenia than the yuan, while the yen is not considered as a promising common currency because of the Japanese deflation during the recent period. This study also investigates the connection between business-cycle correlation and trade flows among countries. The evidence shows that increasing trade intensity with China has led to a greater synchronization of business cycles between China and 43 Asian economies during 1982-2011. Most Asian economies have grown dramatically closer trade ties with China than with Japan or the U.S. over the period, which resulted in higher cyclical correlation with China. This finding strengthens the net benefits of forming a Yuan Optimum Currency Area in Asia region since the destabilizing costs of joining a currency union diminish when the members are more business-cycle synchronized. The economies that traded most intensively with China over the past decade are Hong Kong, Japan, Laos, Macao, Mongolia, Myanmar, Oman, Kyrgyzstan, Malaysia, Singapore, and Vietnam. Lastly, this study addresses the prospects of two forms of multilateral adoptions in Asia by measuring macroeconomic gains and losses of the potential formations for Asia as a whole and South-Eastern Asia as a whole. Again, the results show that more (less) gains often coexist with more (less) losses. Five economies, Brunei, Indonesia, Laos, Vietnam and Timor-Leste are promising candidates of joining South-Eastern Optimum Currency Area.
SubjectOptimum Currency Area