Asian Currency Unit (ACU), deviation indicators and exchange rate coordination in East Asia: A panel-based convergence approach

- Intra-East Asian exchange rate movements have not converged to form one bloc.
- A separate number of convergent clubs in the region have formed in recent years.
- The number and composition of clubs depend on which deviation indicator and period used.
- There are two opposing convergent poles of relatively depreciating and appreciating currencies.
- Our results have important policy implications on exchange rate coordination in East Asia.

Employing the panel convergence method of Phillips and Sul (2007) to the nominal deviation indicators of two recent unofficial constructions of an Asian Currency Unit (ACU) index, this paper examines the existence and extent of convergence in the movements of East Asian currencies against the ACU. Empirical results reveal that intra-East Asian exchange rate movements have not converged to form one, cohesive and unified bloc where currencies share homogenous movements, regardless of whether one examines the data on intra-East Asian exchange rate movements before or after the collapse of Lehman Brothers in September 2008. Instead, a separate number of convergent clubs or blocs in the region have formed in recent years. Finally, and most importantly, we observe at the end of the period of our examination that economies in the region are, generally, converging at different speeds to two opposing poles of convergence, that is, groups of relatively depreciating currencies and, on the other, groups of relatively appreciating currencies.