Is East Asia Fit for an Optimum Currency Area? An Assessment of the Economic Feasibility of a Higher Degree of Monetary Cooperation in East Asia

Abstract

This paper attempts to make a contribution to the recent search for a suitable assessment of the economic feasibility of a higher degree of monetary cooperation in East Asia. By using a structural vector autoregression approach as well as a generalized purchasing power parity approach, we find that a larger group of appropriately selected East Asian economies does satisfy the macroeconomic conditions for forming an Optimum Currency Area (OCA). The East Asian group consists of four ASEAN countries (Indonesia, Malaysia, Singapore, and Thailand) and four Northeast Asian economies (Hong Kong SAR, Japan, Republic of Korea, and Taiwan). This finding presents a striking contrast to the existing research results whose policy recommendation has generally been that countries in East Asia should start with a smaller subgroup currency area. It is time that many East Asian economies as a region made a serious effort to pursue a higher degree of monetary cooperation among themselves for forming an OCA.

Southeast Asian monetary integration: New evidences from fractional cointegration of real exchange rates

“…Obiyathulla (2008) examines the feasibility of a Common Currency Area (CCA) for 14 East Asian countries and finds that while a regionwide CCA is not feasible, several paired clusters are potential candidates. Additionally, though Genberg and Siklos (2010) do not clearly identify a group of countries for which shocks are unambiguously highly correlated, Ahn et al (2006) find a group of seven East Asian economies (Indonesia, Malaysia, Singapore, Thailand, Hong Kong SAR, Korea, and Taiwan) qualified for an OCA in terms of macroeconomic shocks. As can be observed, these results do not lead to firm conclusions 10 .…”

Optimum currency areas, structural changes and the endogeneity of the OCA criteria: evidence from six new EU member states

“…Antonucci and Girardi (2006) use the real exchange rates of 11 EMU countries and examine the effects of structural changes on the behaviour of the real exchange rates. Aggarwal and Mougoue (1993), Ogawa and Kawasaki (2003), Choudry (2005), Ahn et al (2006), Kawasaki and Ogawa (2006) and Wilson and Choy (2007) use the concept of G-PPP in order to provide insights on whether East Asian countries should proceed to a monetary union. Neves et al (2008) examine whether the Mercosur economies form an OCA.…”

South East Asian Monetary Integration: New Evidences from Fractional Cointegration of Real Exchange Rates

“…In related studies, Bayoumi and Eichengreen (1994) find that supply shocks are symmetric, on the one hand, between Singapore, Malaysia, Indonesia and Hong-Kong; on the other hand, between Japan, Taiwan and South Korea. Chow and Kim (2003) Genberg and Siklos (2010) do not clearly identify a group of countries for which shocks are unambiguously highly correlated, Ahn et al (2006) find a group of seven East Asian economies (Indonesia, Malaysia, Singapore, Thailand, Hong Kong SAR, Korea, and Taiwan) qualified for an OCA in terms of macroeconomic shocks. As can be observed, these results do not lead to firm conclusions 10 .…”