Jeon, Bang Nam and Zhang, Hongfang (2007): A currency union or an exchange rate union: evidence from Northeast Asia. Published in: Journal of Economic Integration , Vol. 22, No. 2 (1. June 2007): pp. 256-287.
Download (287kB) | Preview
This paper examines whether or not Northeast Asia economies, namely, China, Japan, Korea, and Taiwan, can form a currency union, where a single currency and a uniform monetary policy are adopted, or an exchange rate union where all the currencies are pegged to an internal or external currency or an optimum currency basket. The analysis of correlations of supply shocks, exchange rate shocks, monetary shocks, and demand shocks, which are estimated applying the structural VAR model with identification restrictions imposed, to the data for the period from 1970 through 2004, shows that shocks of these economies are not symmetric, in general, implying that the Northeast Asian economies are not ready yet to form a common currency union. However, it is found that the Northeast Asian countries can form an exchange rate union with a major currency basket, which consists of the U.S. dollar, the euro and the Japanese yen, as an anchor currency. The paper also examines the option of pegging to a basket of regional currencies, similar to the Asian Currency Unit (ACU), and discusses policy implications.
|Item Type:||MPRA Paper|
|Original Title:||A currency union or an exchange rate union: evidence from Northeast Asia|
|English Title:||A Currency Union or an Exchange Rate Union: Evidence from Northeast Asia|
|Keywords:||currency union; exchange rate union; optimum currency areas; Northeast Asia|
|Subjects:||O - Economic Development, Technological Change, and Growth > O5 - Economywide Country Studies > O53 - Asia including Middle East
F - International Economics > F3 - International Finance > F33 - International Monetary Arrangements and Institutions
F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration
|Depositing User:||Bang Nam Jeon|
|Date Deposited:||13. Feb 2012 02:50|
|Last Modified:||12. Feb 2013 13:43|
Asian Development Bank. (2004). Monetary and Financial Integration in East Asia: The Way Ahead, Vol. 1, ed., ADB, New York, NY: Palgrave Macmillan.
Bayoumi, T., Eichengreen, B. (1994). One Money or Many? Analyzing the Prospects for Monetary Unification in Various Parts of the World. Princeton Studies in International Finance, No. 76, Princeton University.
Bénassy-Quéré, A. (1999). “Optimal Pegs for East Asian Currencies,” Journal of the Japanese and International Economics 13, 44-60.
Bhandari, J. (1985). “The flexible exchange basket: a macroeconomic analysis,” Journal of International Money and Finance 1, 19-41.
Blabchard, O. and Quah, D. (1989). “The dynamic effects of aggregate demand and supply disturbances,” American Economic Review 79, 655-673.
Cheung, Y. and Yuen, J. (2004). “An output perspective on a Northeast Asia currency union,” Prospects for Monetary Unions after the Euro, ed. P. Grauwe and J. Mélitz. Cambridge: The MIT Press.
Chow, H. K. and Kim, Y. (2003). “A common currency peg in East Asia? Perspectives from Western Europe,” Journal of Macroeconomics 25, 331-350.
Eichengreen, B. and Bayoumi, T. (1996). “Is Asia an optimum currency area? Can it become one? Regional, global and historical perspectives on Asian monetary relations,” CEPII/AMUE/KDI Conference in Exchange Rate Policies in Emerging Asian Countries, Seoul.
Eichengreen, B., (2006). “The parallel currency approach to Asian monetary integration,” 2006 AEA conference paper. Frankel, J.A. and Rose, A.K. (1998). “The endogeneity of the optimum currency area criteria,” The Economic Journal 108(July), 1009-1025.
Gali, G. (1992). “How well does the IS-LM model fit postwar U.S. data?” The Quarterly Journal of Economics 107(2), 709-738.
Huang, Y. and Guo, F. (2006). “Is currency union a feasible option in East Asia? A multivariate structural VAR approach,” Research in International Business and Finance 20(1), 77-94.
Karras, G. (2005). “Is there a yen optimum currency area? Evidence from 18 Asian and Pacific economies,” Japan and the World Economy 17, 456-469.
Kawai, M. and Takagi, S. (2000). “Proposed strategy for a regional exchange rate arrangement in post-crisis East Asia,” The World Bank Policy Research Working Paper 2503.
Kenen, P. B. (1969). “The theory of optimum currency areas,” Monetary Problems of the International Economy, ed. R. A. Mundell and A. K. Swoboda. Chicago: The University of Chicago Press.
Kim, Y. and Sun, W. (2005). “Asymmetric shocks and the choice of exchange rate regimes in East Asia,” unpublished manuscript.
Kwack, S. Y. (2004). “An optimum currency area in East Asia: Feasibility, coordination, and leadership role,” Journal of Asian Economics 15, 153-169.
Kwan, C. (2000). The Yen Block: Toward Economic Integration in Asia. Brooking Institution Press, Washington D.C.
Larrain, F. and Tavares, J. (2005). “Regional currencies versus dollarization: options for Asia and the Americas,” Prospects for Monetary Unions after the Euro, ed., P. Grauwe and J. Melitz. Cambridge: The MIT Press.
Lee, J-W. and Barro, R.J. (2006). “East Asian Currency Union,” working paper, October.
Lim, L. (2005). “A dollar or yen currency union in East Asia,” Mathematics and Computers in Simulation 68, 505-518.
McKinnon, R. I. (1963). “Optimum currency areas,” American Economic Review 51, 717-724.
McKinnon, R. I. (2000). “After the crisis, the East Asian dollar standard resurrected: An interpretation of high-frequency exchange-rate pegging”, Rethinking the East Asian Miracle, ed. J. Stiglitz and S. Yusuf. World Bank and Oxford University Press.
McKinnon, R.I., Pill, H. (1999). “Exchange-rate regimes for emerging markets: Moral hazard and international overborrowing,” Oxford Review of Economic Policy 15, 19-38.
Moon, W., Rhee, Y., and Yoon, D. (2006). Regional Currency Unit in Asia: Property and Perspective, Korea Institute for International Economic Policy (KIEP) Working Paper 06-03, Seoul, Korea.
Mundell, R. (1961). “A theory of optimum currency areas,” American Economic Review 51, 657-665.
Ogawa, E., Ito, T. (2002). “On the desirability of a regional basket currency arrangement,” Journal of the Japanese and International Economics 16, 317-334.
Sakakibara, E., Yamakawa, S. (2003). “Regional integration in East Asia: challenge and opportunity-Part II: Trade, Finance and Integration,” The World Bank Policy Research Working Paper 3079.
Schnabl, G. (2005). “Synchronized business cycles in East Asia and fluctuations in the yen/dollar exchange rate,” Exchange Rates under the East Asian Dollar Standard: Living with Conflicted Virtue, ed. R. McKinnon. Cambridge: The MIT Press.
Zhang, Z., Sato, K. (2005). “Whither currency union in greater China?” Center for International Trade Studies Working Paper, 2005-01.
Zhang, Z., Sato, K., McAleer, M. (2004). “Is a monetary union feasible for East Asia?” Applied Economics 36, 1031-1043.