A single currency for Asia? Evaluation and comparison using hierarchical and model-based cluster analysis

Abstract

Today, there is increased speculation on the possibility of an Asian currency, as the region begins to show increased promise as a region of nascent economic activity. Any monetary integration scheme in East Asia would likely have to include both China and India though, so this paper attempts to assess the evolution of convergence among the East Asian countries, including China and India, according to the optimum currency area theory criteria, which is operationalized through the use of cluster analysis. In this paper we use both traditional "hierarchical" clustering as well as the more recently developed "model-based" clustering techniques and compare the outcome in each case. As the East Asian crisis of 1997-98 is likely to a¤ect the results, the exercise is done for pre-crisis, crisis, and post-crisis periods. The results reveal some structure among the countries, an increase in the degree of subregional homogeneity, and a robust relationship between Malaysia and Singapore