THE SUITABILITY OF A GREATER CHINA CURRENCY UNION YIN-WONG CHEUNG JUDE YUEN CESIFO WORKING PAPER NO. 1192 CATEGORY 6: MONETARY POLICY AND INTERNATIONAL FINANCE MAY 2004 An electronic version of the paper may be downloaded • from the SSRN website: www.SSRN.com • from the CESifo website: www.CESifo.de CESifo Working Paper No. 1192 THE SUITABILITY OF A GREATER CHINA CURRENCY UNION Abstract The study assesses the level of integration among the three Greater China economies (namely China, Hong Kong, and Taiwan) and examines the suitability of a Greater China currency union. Currently, the three economies have extensive trade and investment linkages. Our analyses show that these economies share common long-run and short-run cyclical variations. We also estimate the output costs of relinquishing policy autonomy to form a currency union. The estimated output losses, which depend on, for example, the method used to generate shock estimates, seem to be moderate and are likely to be less than the efficient gains derived from a currency union arrangement. JEL classification: F33, F31, F41. Keywords: Greater China, trade and investment, common stochastic trend, synchronized and non-synchronized business cycles, output losses, exchange rate regime. Yin-Wong Cheung Jude Yuen Economics Department Economics Department University of California University of California Santa Cruz, CA 95064 Santa Cruz, CA 95064 U.S.A. U.S.A.
[email protected] [email protected] The authors thank the seminar participants at the Peking University and Shandong University for their comments and suggestions. Also, we thank Desmond Hou and Dickson Tam for compiling the data. The financial support of faculty research funds of the University of California, Santa Cruz is gratefully acknowledged.