China and the Dollar: An Optimum Currency Area View

Abstract

This paper attempts to assess how compatible China is with respect to its dollar-based exchange rate regime. Assessment is made in terms of the real convergence criteria suggested by the optimum currency areas (OCA) theory. In light of the endogenous problem in OCA analysis and this view of convergence criteria, the relevant features of China are evaluated against economies implementing rigid dollar standard in practice, namely Hong Kong, Macau, and Panama. Findings suggest that economic conditions in China broadly conform to those prevailing in these economies which maintain strong links to the US dollar.

China’s Dollar-linked Hong Kong during the Global Crisis

“…(2003, p. 315) Whilst the benefit of importing price stability from the US has been shown to be questionable in the preceding section, in this section we shall explore if Hong Kong's dollar peg is still as appropriate as before, based on the prescriptions inspired by the OCA theory. Following Quah (2017Quah ( , 2016aQuah ( , 2014b, and Quah and Crowley (2010, 2012a, 2012b, the OCA criteria investigated in this section are bilateral trade intensity, business cycle symmetry, inflation convergence, real interest rate synchronisation, and diversification in exports. These criteria were implemented by Artis and Zhang (2002) and interestingly the efficacy of the criteria was evidenced when Portugal, Italy, Greece, and Spain were selected as the group which possesses the least similar OCA features against Germany.…”

A Diagnostic on the West African Monetary Union

“…While similarity of trade and industry is important so that shocks become more symmetric, it is the consequence of business cycle movement that is ultimately critical as a measure of similarity of shocks. This can be adequately captured by the real business cycle symmetry dimension demonstrated by Quah and Crowley () which is adopted here.…”