Centre for Public Policy Studies 5 7 Lingnan University Hong Kong No . 109 ( 3 / 01 ) CPPS THE WORLD CURRENCY UNIT : CAN IT WORK ? by Professor Lok

This paper uses the World Currency Unit framework of Ho (2000) to consider the feasibility and the benefits for a country to link its currency to the WCU. It also throws light on the workability of “global bonds” denominated in the WCU. Empirical data from Hong Kong, Japan, the United States, the UK, and South Korea are used. The data suggest that a real exchange rate concept that can be compared across nations can be built on the WCU and is a useful explanatory variable for real exports. A country that pegs its currency to the WCU is also likely to enjoy lower and more stable real interest rates, less fluctuations in competitiveness, and lower inflation. A WCU-exchange standard among smaller countries, and independent monetary policy among the key countries constituting the WCU, appear to be a feasible option that will bring the world closer to monetary and capital market integration. JEL Number: E44, F33, F14 * This paper was presented at the CEANA session of the AEA meeting in New Orleans in January 2001 and an earlier version was presented in the HKEA meeting. Thanks are due to Michael Devereux and Herbert Grubel for their comments on early versions of the paper. The able research assistance rendered by Gary Wong is gratefully acknowledged.