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How Far Apart Are Two ACUs from Each Other? : Asian Currency Unit and Asian Currency Union

November 2006
Shingo Watanabe*1
Masanobu Ogura*2

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This paper examines the future evolution of the Asian currency arrangements from broader perspectives, including the optimal currency area theory and the experience with the European Currency Unit (ECU). Most academic literature on this topic concurs that the optimal currency area conditions seem to be met by subsets of Asian countries although the ultimate success of an Asian currency union hinges crucially on such factors as the historical and political backgrounds, robustness of institutional set-ups, degree of regional convergence in developmental stages, and track record of sound macroeconomic policy in constituent countries. It is also a valid concern whether the transition toward a currency union could be susceptible to speculative currency assault. The experience with the ECU suggests that a successful Asian currency unit requires preconditions including the firm political commitment, market-wide expectations of the eventual currency unification, and existence of well-functioning financial markets as well as cross-border payment/settlement systems. We can learn further from the fact that the ECU was handicapped by a lack of cash currency, which led to its limited use in commercial transactions, and inadequacies of settlement arrangements. The ECU as a divergence indicator was also rarely focused on, despite the fact that the exchange intervention thresholds were defined in relation to the ECU.

Mr. Shigeto Nagai encouraged us to write this paper and also offered detailed comments on it. Description of the ADXY owes much to information from the Foreign Exchange Operations, Financial Markets Department of the Bank of Japan. We would also like to acknowledge the following individuals for their very helpful comments: Mr. Tetsuya Inoue, Mr. Yuji Osawa, Ms. Chikako Ohashi, Mr. Takeshi Shirakami, Mr. Hidehiko Sogano, Mr. Hiroshi Fujiki, Mr. Akinari Horii, Mr. Satoshi Kawazoe, Mr. Ken Matsushita, Mr. Satoru Yamadera and Mr. Kenichiro Watanabe. However, any possible mistakes are attributable to the authors alone. In addition, the contents of this article and the opinions therein are the personal views of the authors and do not represent the official opinion of the Bank of Japan or of its International Department.

  • *1 International Department
  • *2 International Department


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