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Re-examining Symmetry of Shocks for East Asia: Results Using a VAR with Sign Restrictions

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Author Info
Vu Tuan Khai
Abstract

I revisit the hotly debated topic regarding the possibility of introducing a common currency for East Asia from the point of view of shock symmetry. I first point out a serious problem of the existing studies which use the VAR method with long-run restrictions developed by Blanchard and Quah (1989) in that the signs of the impulse response functions to the same structural shock are not necessarily consistent across the countries. This means that the high (low) correlations of structural shocks do not necessarily imply low (high) costs of a common currency area. To overcome this problem, I apply the VAR method with sign restrictions developed by Uhlig (2005). I used the AD-AS model to impose sign restrictions on the responses of GDP and CPI to demand and supply shocks. One main finding is that demand shocks are significantly positively correlated among almost all East Asian countries. But overall, East Asia as a whole is not suitable for a common currency because correlations of supply shocks are low.

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Paper provided by Institute of Economic Research, Hitotsubashi University in its series Global COE Hi-Stat Discussion Paper Series with number gd08-042.

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Date of creation: Mar 2009
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Handle: RePEc:hst:ghsdps:gd08-042

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Related research
Keywords: Structural VAR; Long run restriction; Sign restriction; Symmetry of Shocks; Common Currency; East Asia;

Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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  1. Cohen, Daniel & Wyplosz, Charles, 1989. "The European Monetary Union: An Agnostic Evaluation," CEPR Discussion Papers 306, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Gert Peersman & Roland Straub, 2004. "Technology shocks and robust sign restrictions in a euro area SVAR," Working Paper Series 373, European Central Bank. [Downloadable!]
  3. Kim, David, 2007. "An East Asian currency union?: The empirical nature of macroeconomic shocks in East Asia," Journal of Asian Economics, Elsevier, vol. 18(6), pages 847-866, December. [Downloadable!] (restricted)
  4. Bayoumi, Tamim & Eichengreen, Barry & Mauro, Paolo, 2000. "On Regional Monetary Arrangements for ASEAN," Journal of the Japanese and International Economies, Elsevier, vol. 14(2), pages 121-148, June. [Downloadable!] (restricted)
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  5. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September. [Downloadable!] (restricted)
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  6. Uhlig, Harald, 2005. "What are the effects of monetary policy on output? Results from an agnostic identification procedure," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 381-419, March. [Downloadable!] (restricted)
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  7. Kiyotaka Sato & Zhaoyong Zhang, 2006. "Real Output Co-movements in East Asia: Any Evidence for a Monetary Union?," The World Economy, Blackwell Publishing, vol. 29(12), pages 1671-1689, December. [Downloadable!] (restricted)
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