Regional Currency Unit in Asia: Property and Perspective

Author: 
Woosik Moon
Yeongseop Rhee
Deokryong Yoon
Description: 
KIEP Working Paper 06-03
JEL codes: 
Organisation: 
Abstract: 
This paper examines different properties of the regional currency unit (RCU) in Asia and estimates the value of the RCU as a weighted average of East Asian currencies according to the method used to calculate the ECU under the EMS. The basket feature of the RCU yields benefits and costs. First, the use of the RCU central rate can make the intervention burden of a central bank less onerous than the use of a bilateral exchange rate. Also, for any given band of margins, a basket unit offers more flexibility than a bilateral exchange rate. Another advantage of using the RCU is that the variance of RCU exchange rates is smaller than the variance of exchange rates of component countries. However, the usefulness of the RCU as a unit of account for domestic transactions and contracts will be very limited because of information costs and uncertainty about the value of the RCU. Also, theintroduction of the RCU raises the important problem of asymmetry for foreign exchange market intervention. Once such a problem is solved, the RCU can be then used as a divergence indicator to monitor the exchange rates of Asian currencies between themselves and against the US dollar or the euro. The creation of the RCU is a good way to coordinate policies and assure exchange stability between Asian countries.