The Prospects of a Monetary Union in East Asia

Abstract

This paper assesses the empirical desirability of the East Asian economies to form a monetary union. The Structural Vector Autoregression (VAR) method is employed to assess the nature of macroeconomic disturbances among the East Asian countries, as a preliminary guide in identifying potential candidates for forming an Optimum Currency Area OCA. In comparison with the European countries, East Asia has less symmetric underlying structural shocks but the speed of adjustment to shocks is much faster. The empirical results suggest that there exists scope among some small sub-regions, comprises mainly of the ASEAN countries, for potential monetary integration. The finding of increased symmetry of shocks among countries after the Asian Financial crisis indicates that the regional policy-coordinating effort after the crisis has put the region on the right track if monetary union is a desired goal.

Keywords: Optimum Currency Area, Monetary Union, Vector autoregression, Exchange rate, East Asia

JEL Classification: F44, F36, F41