Having one currency, will it affect the economy of its members?

Let's say we are planning to have one asian currency. Japanese currency, yen has a very high exchange rate compared with Philippine peso. If Japan and Philippines and all the other asian countries would share one currency, yen for example, will the exchange rate of yen depreciate?|||In creating a common currency, there is a necessary period of alignment of exchange rates where the central banks of the joining nations must intervene in the market to keep the exchange rates roughly stable. During this time, one nation may need to inflate its currency and another deflate it. This will definitely have some short-run impact on the joining nation's economies, and may require transfer payments among the nations to keep the poorer countries from facing a degree of economic hardship and which may seem unfair to the countries granting the payments, both of which might make the combination of currencies politically untenable.





Once created, the biggest issue with single currency situations is the risk of something called "contagion". When an economy with its own currency faces a recession, it can employ monetary policy to reduce interest rates and move the economy back towards full employment. When tied together through a common currency, the nation cannot employ independent monetary policy and its recessionary trends will spill over through lower demand for imports into other nations using the same currency.|||Yes, especially if you would add Japan to the mix of countries using the currency. This would be a big boost for the small countries that would join the single currency, since it will drastically reduce their borrowing costs, and transaction costs between the nations using the said currency. If japan ever joins the single currency, then the depreciation of the Yen shall be an non-issue, since it will be taken out of circulation.|||There are several models you can use to predict the behavior of exchange rates. If you go with the balance of trade model, tempting because of Japan's surplus, you can predict that a common currency with several other asian countries would reduce the overall trade surplus, since the balance with the phillipines is closer to even. Lets leave china and russia out of the discussion as I assume you would have mentioned them if you intended them to be included, and they would not agree to such an arangement anyway.





So, if the overall effect was to reduce an imbalance of trade, vs what exists today with the yen and many of its trading partners, then we can expect the yen to fall in value relative to what it is today





from wiki:











Balance of payments model





This model holds that a foreign exchange rate must be at its equilibrium level - the rate which produces a stable current account balance. A nation with a trade deficit will experience reduction in its foreign exchange reserves which ultimately lowers (depreciates) the value of its currency. The cheaper currency renders the nation's goods (exports) more affordable in the global market place while making imports more expensive. After an intermediate period, imports are forced down and exports rise, thus stabilizing the trade balance and the currency towards equilibrium.





Like PPP, the balance of payments model focuses largely on trade-able goods and services, ignoring the increasing role of global capital flows. In other words, money is not only chasing goods and services, but to a larger extent, financial assets such as stocks and bonds. Their flows go into the capital account item of the balance of payments, thus, balancing the deficit in the current account. The increase in capital flows has given rise to the asset market model.


[edit] Asset market model


See also: Capital asset pricing model and Net Capital Outflow





The blowing up in trading of financial assets (stocks and bonds) has reshaped the way analysts and traders look at currencies. Economic variables such as economic growth, inflation and productivity are no longer the only drivers of currency movements. The proportion of foreign exchange transactions stemming from cross border-trading of financial assets has dwarfed the extent of currency transactions generated from trading in goods and services.





The asset market approach views currencies as asset prices traded in an efficient financial market. Consequently, currencies are increasingly demonstrating a strong correlation with other markets, particularly equities.





Like the stock exchange, money can be made or lost on the foreign exchange market by investors and speculators buying and selling at the right times. Currencies can be traded at spot and foreign exchange options markets. The spot market represents current exchange rates, whereas options are derivatives of exchange rates|||ONE WORLD CURRENCY = ONE WORLD GOVERNMENT.





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