Shocking Aspects of East Asian Monetary Integration: an Optimum Currency Area Approach
Faculty of Business and Law
School of Accounting, Finance and Economics
This paper examines the viability of regional monetary integration in East Asia by focusing on the symmetry of shocks, one of the preconditions for forming an optimum currency area (OCA). We extend the conventional 2-variable structural VAR model by incorporating foreign (specifically, US) variables, as well as real effective exchange rates to capture country-specific shocks in our estimation. We also provide similar estimates for European countries to test for robustness. Impulse response function analysis is conducted to measure the size of shocks and the speed of adjustment to shocks. The empirical results reveal that it is less feasible for the East Asian economies to form an OCA than suggested in previous studies, whereas only small sub-groups are potential candidates for a currency arrangement.