Which country should be the monetary anchor for East Asia: the US, Japan or China?

Abstract

In this paper, we apply the optimum currency area (OCA) criteria to assess the suitability of whether the US, Japan or China would best serve as the monetary anchor country for East Asian countries. The OCA 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 an increase in the potential for China as a monetary anchor in the future but the US dollar likely still is the most obvious choice of anchor currency. From an endogenous OCA perspective, the findings also broadly support the existing currency boards in Hong Kong and Macau and the monetary union between Singapore and Brunei.