Monetary Anchor for East Asia: US, Japan, or China?

Abstract

In this paper we apply the optimum currency area (OCA) criteria to assess the suitability of whether the United States, Japan, or China would best serve as monetary anchor country for East Asian countries. The criteria used are trade openness, business cycle synchronisation, real exchange rate volatility, inflation convergence, and real interest rate cycle synchronisation. The ‘performance’ of these potential anchor countries is compared before and after the Asian financial crisis. The findings suggest rising potentiality of China being the center country. In another aspect, the findings also broadly support the prevailing currency boards in Hong Kong and Macau and the monetary union between Singapore and Brunei.

Keywords: optimum currency area, Asia, monetary union, business cycle, China, money

JEL Classification: F33, N15