Potential Currency Areas in East Asia Using United States, Japan, or China as the Monetary Anchor

Abstract

This paper applies fuzzy clustering techniques to developed and emerging economies in East Asia, in order to arrive at an identification of potential subgroups of economies for monetary union. The statistical criteria employed is the one suggested by the Optimal Currency Areas theory, and the period examined includes the recent global crisis. Three alternative monetary anchor countries are proposed, namely the United States, Japan and China, and hence, to an extent, the analysis does indicate the relative importance of the three world’s largest economies to East Asia. Due to the endogeneity of the convergence criteria in the eurozone, founding member states of EMU are used as a point of reference for East Asia to indicate the level of preparedness for monetary union in this region. Findings indicate that Singapore and Hong Kong are relatively prepared for integration. In addition, results do also signify the dominance of Japan despite the prevalence of the dollar standard in the region.