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Real effects of common currencies in East Asia

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  • Shirono, Kazuko
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    Abstract

    Since the 1997 Asian currency crisis, new interest has emerged in the formation of a common currency area in East Asia. This paper provides estimates of trade and welfare effects of East Asian currency unions, using a micro-founded gravity model. Counter-factual experiments to assess the effects of various hypothetical currency arrangements for East Asia suggest that an East Asian currency union will double bilateral trade in the region, but the resulting welfare effects will be moderate. However, if Japan, a major trade partner for East Asia, is included in the union, welfare effects increase substantially. The evidence thus suggests that certain regional currency arrangements in East Asia will stimulate regional trade rigorously and can generate economically significant welfare gains.

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    File URL: http://www.sciencedirect.com/science/article/B6W53-4RYNMFX-1/1/43408630b0cc9ced20d69a7ad1128a24
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Asian Economics.

    Volume (Year): 19 (2008)
    Issue (Month): 3 (June)
    Pages: 199-212

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    Handle: RePEc:eee:asieco:v:19:y:2008:i:3:p:199-212

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    Web page: http://www.elsevier.com/locate/asieco

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    References

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    1. Glick, Reuven & Rose, Andrew K, 2001. "Does a Currency Union Affect Trade? The Time Series Evidence," CEPR Discussion Papers 2891, C.E.P.R. Discussion Papers.
    2. Ogawa, Eiji & Ito, Takatoshi, 2002. "On the Desirability of a Regional Basket Currency Arrangement," Journal of the Japanese and International Economies, Elsevier, vol. 16(3), pages 317-334, September.
    3. James E. Anderson & Eric van Wincoop, 2001. "Borders, Trade and Welfare," Boston College Working Papers in Economics 508, Boston College Department of Economics.
    4. James E. Anderson & Eric van Wincoop, 2001. "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Papers 8079, National Bureau of Economic Research, Inc.
    5. Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic Journal, Royal Economic Society, vol. 108(449), pages 1009-25, July.
    6. Jeffrey A. Frankel & Shang-Jin Wei, 1994. "Yen Bloc or Dollar Bloc? Exchange Rate Policies of the East Asian Economies," NBER Chapters, in: Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, NBER-EASE Volume 3, pages 295-333 National Bureau of Economic Research, Inc.
    7. Jeffrey A. Frankel, 1992. "Is Japan Creating a Yen Bloc in East Asia and the Pacific?," NBER Working Papers 4050, National Bureau of Economic Research, Inc.
    8. Andrew K. Rose & Eric van Wincoop, 2001. "National Money as a Barrier to International Trade: The Real Case for Currency Union," American Economic Review, American Economic Association, vol. 91(2), pages 386-390, May.
    9. Baldwin, Richard & Taglioni, Daria, 2006. "Gravity for Dummies and Dummies for Gravity Equations," CEPR Discussion Papers 5850, C.E.P.R. Discussion Papers.
    10. Kwan, C. H., 1998. "The theory of optimum currency areas and the possibility of forming a yen bloc in Asia," Journal of Asian Economics, Elsevier, vol. 9(4), pages 555-580.
    11. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
    12. Peter B. Clark & Shang-Jin Wei & Natalia T. Tamirisa & Azim M. Sadikov & Li Zeng, 2004. "A New Look at Exchange Rate Volatility and Trade Flows," IMF Occasional Papers 235, International Monetary Fund.
    13. Chow, Hwee Kwan & Kim, Yoonbai, 2003. "A common currency peg in East Asia? Perspectives from Western Europe," Journal of Macroeconomics, Elsevier, vol. 25(3), pages 331-350, September.
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    Cited by:
    1. Tomáš Havránek, 2009. "Rose Effect and the Euro: The Magic is Gone," Working Papers IES 2009/20, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Aug 2009.
    2. Havranek, Tomas, 2009. "Rose Effect and the Euro: Is the Magic Gone?," MPRA Paper 18479, University Library of Munich, Germany, revised 07 Nov 2009.
    3. Aggarwal, Raj & Muckley, Cal B., 2010. "Assessing co-ordinated Asian exchange rate regimes: Proposal for a possible move towards a common currency," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(2), pages 149-165, April.

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