Exchange rate coordination in Asia under regional currency basket systems

In this paper, I examine to what extent Asian exchange rates are coordinated around a synthetic Asian Currency Unit (ACU) defined as a basket of Asian currencies. Using a VAR model, the results provide some evidence of stabilization among Asian exchange rates around the ACU. Although the US dollar remains the dominant anchor within the region, these countries have allowed for more exchange rate flexibility against the US dollar since 2006, with the aim to adopt a basket peg in which Asian currencies have gained an increasing role. The empirical results also suggest that the official adoption of an undisclosed currency basket by the Chinese authorities in July 2005 has been an important factor in the decision of Asian countries to shift toward a de facto currency basket system.