Prospects for a Chinese currency area: simulations of Robert Mundell's multi-currency monetary union

Based on Robert Mundell's proposal for an Asian multi-currency monetary union, this paper provides a framework to analyze whether a prospective Chinese currency union can be sustained after suffering from various shocks. An important assumption is that China and Taiwan can coordinate their economic policies without losing their independent national currencies. A dynamic game approach simulates possible outcomes if a China-Taiwan cooperative mechanism were to be implemented. The results show that the China-Taiwan coalition can be feasible under the shock of currency appreciation.