Ahmed M Khalid & Gulasekaran Rajaguru
Globalisation and Development Center, Bond University, Australia
Abstract
Given the nature of East Asia’s economic structure, interregional exchange rate stability is an essential requirement for regional economic integration. Chiang Mei Initiative has further emphasized the need for East Asia to have more exchange rate coordination in the region. As the possibility of a single currency for East Asia is perhaps not feasible due to lack of academic support for the region to quality as an Optimum Currency Area (OCA), the other two options are (a) an anchor currency or (b) a currency basket. The emergence of China as a major player in the region requires this issue to be revisited. This paper investigates which option is more suitable (or preferable) for emerging East Asian countries. We compare the feasibility of an anchor with the basket arrangement. We argue that any analysis on future currency arrangements without looking into bilateral trade relations within East Asian region could provide misleading results and hence inappropriate policy implications. In particular, the paper examines the dynamic linkages between a selected sample of East Asian currencies (Indonesian rupiah, South Korean won, Malaysian ringgit, Philippine peso, Singaporean dollar and Thailand bhat) with each potential anchor currency (the Australian dollar, Japanese yen, euro and U.S. dollar) As an extension to the analysis, we also include the Chinese renminbi as an alternative anchor to identify its importance in the sample of Asian countries. Utilizing the recently developed Yamamoto and Kurozumi (2006) technique, this paper does not find any support to the much debated emergence of a ‘yen bloc’, euro bloc, or ‘koala bloc’, which suggests that the Japanese yen, euro or Australian dollar do not play a significant role in the East Asian currency market. The empirical evidence brought forward in this paper suggests that the US dollar is still a dominant currency in East Asian region.
Key Words: Anchor currency, Cointegration, Dynamic linkages, Granger causality, Vector error correction model (VECM), East Asian currency arrangements
JEL Classification: F33, F36, C18, C22
Correspondence to: Ahmed M. Khalid, School of Business and Globalisation and Development Center (GDC), Bond University, Gold Coast, QLD 4229, Australia, Fax: (617) 5595-1160, E-mail: akhalid@bond.edu.au