Does East Asia Move towards an Optimum Currency Area? Evidence from the Multivariate Structural VAR Analysis

Abstract

Focusing on the symmetry in structural shocks and employing a four-variable structural vector auto-regression model, this paper investigated the dynamic trend of the feasibility for East Asian economies to form a currency union. The analysis of correlations of external supply shocks, domestic supply shocks, real demand shocks and monetary shocks (nominal shocks) with a sample period from 1980 to 2010 suggests that it is not reasonable for East Asia to form a single currency union currently in the entire region. However, a viable approach for regional monetary integration would be to start with smaller currency areas: Northeast Asian sub-region cluster including Japan, Korea, Taiwan and Hong Kong, and Southeast sub-regional cluster including Indonesia, Malaysia, Singapore and Thailand, and other economies might be included later. We can reasonably expect that the integration of these sub-regional currency areas may lead to a single currency in East Asia when a sufficient degree of economic convergence is achieved.