Towards an East Asian Monetary Union: An Econometrics Analysis of Shocks

This paper examines the viability of regional monetary integration in East Asia by focusing on the symmetry of shocks, which is one of the preconditions for forming an optimum currency area (OCA). We extend the conventional 2-variable structural VAR model by incorporating foreign (namely, US) variables, as well as real effective exchange rates to capture country-specific shocks in estimation. We also obtain similar estimates for European countries to check 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 East Asian economies to form an OCA than is suggested in previous studies, but they do imply that some sub-groups of the economies, such as some Asian NIEs and ASEAN economies, are more appropriate candidates as their underlying shocks are correlated and symmetric, and the speed of their adjustment to shocks is faster. Acknowledgements: The authors wish to thank Eiji Ogawa, Akira Kohsaka, Shin-ichi Fukuda, Yuko Hashimoto, Etsuro Shioji, Takatoshi Ito and Shujiro Urata for helpful comments. The first and second author thanks the JSPS for financial support through the Grant-in-Aid for Scientific Research (B), 116330059. The third author is most grateful for the financial support of the Australian Research Council.