Regional Monetary Units for East Asia: Lessons from Europe

This paper reports the European experience with a basket currency, the ECU, and how those lessons may apply to the creation of an East Asian regional currency unit. In practice, it turned out that a basket currency entails considerable unexpected technical complexities. The technical particularities of a basket currency are discussed before turning to the criteria for determining the shares of participating currencies. In Europe three criteria were used for determining the weights of shares: GDP shares, international trade shares, and financial market indicators. In addition, weights will change with exchange rate movements. This may require a correction mechanism for political acceptability. From an economic viewpoint, weights depend critically on the purpose of the basket currency: is it a reference indicator, is it a currency for international transactions, or is it a parallel currency? Thus, before weights are discussed, a clear vision of the role of the basket currency is desirable. The vastly different growth performance among Asian economies also suggests a preference to forward- rather than backward-looking measures. Turning then to the different functions of a basket currency, we examine the use of basket currencies as a divergence indicator, or as a financial instrument, in regional financial markets before elaborating a road map for the development of a basket currency in Asia.

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