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Real Effects of Common Currencies in East Asia

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  • Kazuko Shirono
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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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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/166.

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    Length: 23
    Date of creation: 01 Jul 2007
    Date of revision:
    Handle: RePEc:imf:imfwpa:07/166

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    Related research

    Keywords: East Asia; Economic models; exchange rate; bilateral trade; currency unions; trade costs; exchange rate policies; trade barriers; exchange rate policy; exchange rate regime; equilibrium model; trade effects; international trade; trade flows; regional trade; multilateral trade; regional integration; changes in trade; exchange rate arrangements; bilateral trade flows; economic cooperation; elasticity of substitution; real effective exchange rate; bilateral trade barriers; currency areas; exchange rate stability; trade model; optimum currency areas; effective exchange rate; trade partner; average trade; economic integration; flexible exchange rates; exchange rates; constant elasticity of substitution; trade-creating effect; exchange rate volatility; exchange rate instability; trading partners; trade creating; dollar exchange rate; bilateral exchange rate; free trade area; import price; removing trade barriers; increase trade flows; asymmetric shocks; monetary integration; free trade; partner country; world output; alternative exchange rate; bilateral arrangements; trade levels; trade area;

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    1. 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.
    2. Tetsushi Sonobe & Takatoshi Ito & Motoshige Itoh, 1996. "Economic Agglomeration," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number ito_96-2.
    3. Jeffrey A. Frankel & Shang-Jin Wei, 1992. "Yen bloc or dollar bloc: exchange rate policies of the East Asian economies," Pacific Basin Working Paper Series, Federal Reserve Bank of San Francisco 93-01, Federal Reserve Bank of San Francisco.
    4. Andrew K. Rose, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," NBER Working Papers 7432, National Bureau of Economic Research, Inc.
    5. 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.
    6. 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.
    7. Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 108(449), pages 1009-25, July.
    8. James E. Anderson & Eric van Wincoop, 2001. "Borders, Trade and Welfare," Boston College Working Papers in Economics, Boston College Department of Economics 508, Boston College Department of Economics.
    9. 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, Elsevier, vol. 9(4), pages 555-580.
    10. Benassy-Quere, Agnes, 1999. "Optimal Pegs for East Asian Currencies," Journal of the Japanese and International Economies, Elsevier, vol. 13(1), pages 44-60, March.
    11. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, Econometric Society, vol. 70(5), pages 1741-1779, September.
    12. 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, American Economic Association, vol. 91(2), pages 386-390, May.
    13. Chow, Hwee Kwan & Kim, Yoonbai, 2003. "A common currency peg in East Asia? Perspectives from Western Europe," Journal of Macroeconomics, Elsevier, Elsevier, vol. 25(3), pages 331-350, September.
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