Will a Taiwan-China Monetary Union be Feasible? Lessons from Europe
The Europeans regard monetary arrangements as a key element of the overwhelming effort to never again allow hostilities to flare up on their continent. For Taiwan and China, a monetary coordination mechanism may also be appealing in order to eliminate hostilities caused by the Chinese civil war since 1949. Due to certain historical and geopolitical reasons, the impact of a China-Taiwan Economic Union on the world can not be measured by its economic scale only. On the basis of Robert Mundell's earlier proposal and the current development of the European Monetary Union, this paper provides a framework to analyze whether the establishment of a Chinese monetary union (CMU) could be sustained after suffering various economic shocks. We assume that a Chinese central bank coordinates the single monetary policy of the Chinese Economic Area and that China and Taiwan maintain their fiscal independence. An international policy coordination approach is used to simulate possible outcomes if the CMU were to be implemented. The simulation indicates that the U.S. and Japan may suffer welfare losses if China and Taiwan insist on their monetary unification. However, if both the U.S. and Japan accept the CMU, further international policy coordination may help them decrease such kind of losses. The analysis is preliminary but may be helpful in considering the East Asian economic policies.
monetary union, Taiwan, China, international policy coordination,
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