Economic Interdependency and Exchange Rate Flexibility in East Asia

This paper examines if exchange rate flexibility adversely affects trade integration of East Asian countries in general. The study focuses on China, Japan, South Korea and Taiwan. These countries pursue fixed, floating and intermediate regimes respectively. The hypothesis is that since the countries jointly organize East Asian production networks and conduct vertical intra-industry trade (VIIT), the impact of exchange rate flexibility would be negative irrespective of their exchange rate regimes. The results validate the hypothesis. The findings imply that East Asia rather than the domain of any national currency is an optimum currency area