Is a Common Currency Area Feasible for East Asia? A Multivariate Structural Vector Autoregression Approach

In this paper the feasibility of forming a common currency area in East Asia is investigated. A three‐variable structural vector autoregression model is used to identify three types of shocks: global, regional and domestic shocks. The empirical results show that in the post‐crisis period the importance of asymmetric domestic shocks has declined sharply, whereas that of symmetric global and regional shocks has increased. Furthermore, although a ‘prevalent shock’ cannot be uniquely defined, most East Asian economies respond to global and regional shocks in a symmetric way. Although the findings do not provide strong support for forming a common currency area in this region at the current stage, they suggest that most East Asian economies have become relatively symmetric in terms of economic shocks and adjustments, implying that a common currency area might become viable through deepening regional integration.     

Exploring the Case for Monetary Integration between the Chinese Mainland and Hong Kong

This paper presents an empirical investigation on an important policy issue, namely, whether there is any evidence supporting monetary integration between the Chinese mainland and Hong Kong. We follow two lines of inquiry. First, we present a series of simple tests to find the extent to which trade and/or financial linkages exist between the two regions. Second, we use simple inflation and output differentials and structural VAR techniques to test for the degree of business cycle synchronization between the two regions. The results indicate that there is evidence supporting the existence of trade linkages and that there is also support for the possible synchronization of business cycles. We discuss the implications of this for monetary integration between Hong Kong and the mainland.     

Renminbi Exchange Rate: Peg to A Wide Band Currency Basket

Persistent renminbi (RMB) devaluation expectations are one of the greatest threats to China's macroeconomic stability. Market interventions backed by huge foreign exchange reserves and capital controls are not sufficient to eliminate the expectations of devaluation. Creating a market‐based and flexible RMB exchange rate regime holds the key to the elimination of devaluation expectations. The present paper compares the pros and cons of several policy options, and proposes to introduce, as a transition to free floating, a new exchange rate regime pegged to a currency basket with a wide band. The new regime should be able to give the RMB exchange rate enough flexibility to eliminate devaluation expectations as well as prevent excessive overshooting. To ensure a smooth transition, the new regime needs to be supported by controlling cross‐border capital flows.     

Prospects for a Monetary Union in the East Africa Community: Some Empirical Evidence

This paper examines generalised purchasing power parity (G-PPP) and business cycle synchronisation in the East Africa Community with the aim of assessing the prospects for a monetary union. The univariate fractional integration analysis shows that the individual series exhibit unit roots and are highly persistent. The fractional bivariate cointegration tests suggest that there exist bivariate fractional cointegrating relationships between the exchange rate of the Tanzanian shilling and those of the other EAC countries, and also between the exchange rates of the Rwandan franc, the Burundian franc and the Ugandan shilling. The Fractionally Cointegrated Vector AutoRegressive (FCVAR) results imply the existence of a single cointegrating relationship between the exchange rates of the EAC countries. On the whole, there is evidence in favour of G-PPP. In addition, there appears to be a high degree of business cycle synchronisation between these economies. On both grounds, one can argue that a monetary union should be feasible.     

Beyond Borders: The Euro Crisis and Public Support for Monetary Integration in East Africa

We show that economic experiences in one part of the world affect proposed policies elsewhere. Specifically, we find that the recent crisis in the European Monetary Union (EMU) has impacted negatively the public support for the new proposed monetary union in the East African Community (EAC), with a more pronounced effect for less educated Kenyans. That external effect is robust to controlling for an array of other factors such as the expected economic benefits from the union, the desire to gain international influence as part of a larger community and the memory of an earlier failed EAC monetary union.     

Reactions to Shocks and Monetary Policy Regimes: Inflation Targeting Versus Flexible Currency Board in Sub‐Saharan Africa

The paper examines the monetary policy actions through which central banks in sub‐Saharan Africa have tried to eliminate the negative impacts of the shocks facing their economies. We compare two different monetary policy regimes: a currency board regime (in the CFA zone) and an inflation targeting policy regime (Ghana and South Africa) when central banks respond to demand, supply, and fiscal shocks. We extend the usual forecasting and policy analysis system models to replicate the economic features of these economies during the period 2002–12 and to evaluate the impact of several policies in response to these shocks. We find that both policies are inappropriate in helping the economies escape from the effects of negative demand shocks, both are essential when negative shocks to primary balance occur, while inflation targeting dominates the currency board regime as a strategy to cope with positive shocks to inflation.     

Geographic Spread of Currency Trading: The Renminbi and Other Emerging Market Currencies

This paper studies the ongoing diffusion of renminbi (RMB) trading across the globe, the first of such research of an international currency. It analyses the distribution in offshore RMB trading in 2013 and 2016 using comprehensive data from the Triennial Central Bank Survey of foreign exchange markets. In 2013, Asian centers favored by the policy of RMB internationalization had disproportionate shares in global RMB trading. Over the following three years, RMB trading seemed to converge to the spatial pattern of all currencies, with a half‐life of seven to eight years. The previously most traded emerging market currency, the Mexican peso, shows a similar pattern, although it is converging to the global norm more slowly. Three other emerging market currencies show a qualitatively similar evolution in the geography of their offshore trading. Overall, the RMB's internationalization is tracing an arc from the influence of administrative measures to the working of market forces.     

Enhanced Special Drawing Rights: How China Could Contribute to a Reformed International Monetary Architecture

Since the end of the Bretton Woods era, the world has operated on a de facto system of free‐floating exchange rates, with the US dollar as the dominant international currency. The system, characterized by large pro‐cyclical capital flows and chronic imbalances, is inherently unstable, and has contributed to repeated crises, recessions and geopolitical tensions. One potentially “least‐difficult” line of reform would be to allow the evolution of a multi‐currency system, underpinned by an expanded role for Special Drawing Rights (SDRs). Attempts to promote wider use of the SDR have foundered on the liquidity premium. However, for Chinese corporations and institutions, at present restricted in their capital account activities, the SDR liquidity premium would appear less daunting. The Chinese authorities could provide policy encouragement for the use of SDRs by their institutions. This initiative, supported by China's Special Administrative Region Hong Kong, would kick‐start an international SDR ecosystem, and encourage even broader use of SDRs, to the benefit of international monetary stability.     

ASEAN Economic Community: A General Equilibrium Analysis*

The ASEAN Economic Community (AEC) is the largest integration effort attempted in the developing world; if realized, it will create a single market with the free movement of goods, services, foreign direct investment and skilled labor, and freer movement of capital encompassing nearly 600 million people. This study, a first attempt to evaluate the full benefits of the AEC, finds that the project could produce gains similar to those resulting from the European Single Market, amounting to 5.3 percent of the region's income. The benefits could be doubled if, as expected, regional integration also leads to new free trade agreements with key external partners. The whole region will share in these gains. There will be mild trade and investment diversion effects for some other countries, but the world will benefit too. Nevertheless, the AEC poses political challenges: the present study finds that the project will imply significant structural adjustments in several ASEAN economies.     

CAPE VERDE: THE CASE FOR EUROISATION

After a decade of a successful peg to the euro, the authorities of Cape Verde are considering the official euroisation of the country. For an ex ante economic evaluation of such a move, this paper assesses whether Cape Verde fulfills key economic criteria devised by the optimum currency areas literature, using as benchmark the comparable records of the 27 European Union (EU) countries. The answer is positive. Overall, we find that Cape Verde is not less suited for euroisation than some of the current euro area members and most of the remaining members of the EU.