Feasibility of Currency Unions in Asia - An Assessment Using Generalized Purchasing Power Parity -

This paper examined the economic feasibility of forming a regional currency block in Asia, by adopting a generalized purchasing power parity (G-PPP) approach to identify the existence of common trends in real exchange rates among a group of countries. To be specific, we conducted both bilateral and multilateral co-integration estimation on real exchange rates with the samples of 17 Asian countries covering south Asia during the post- 1997-98 crisis period. Our findings are as follows; First, Japan, China and Korea are shown to be little candidate for any optimum currency areas. Second, ASEAN and south Asia, as a group, passed the G-PPP condition. Third, some co-integrating interactions were interestingly found between ASEAN and south Asian members. Our strategic implication emphasizes on the significance of a smaller local subgroup multi-speed strategy toward a long-run goal of currency union in Asia.