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The suitability of a monetary union in East Asia: What does the cointegration approach tell?

  • Sato, Kiyotaka
  • Zhang, Zhaoyong
  • Allen, David

The issue of whether or not to form a monetary union in East Asia remains a hot issue in the study of the East Asian economies. Most of the existing studies apply a framework focusing on the symmetric issue of the fundamental shocks and the extent of correlations by applying the Blanchard and Quah [O.J. Blanchard, D. Quah, The dynamic effects of aggregate demand and supply disturbances, American Economic Review 79 (1989) 655–673] structural vector autoregression (VAR) technique, which includes first-differenced variables in the model and examines only the bilateral relationships. However, the shock symmetry does not necessarily require the co-movements of the real output variables between the countries concerned. The present paper employs the Johansen [S. Johansen, Statistical analysis of cointegration vectors, Journal of Economic Dynamics and Control 12 (1988) 231–254] cointegration approach to check the long-run co-movements of real outputs among the East Asian countries, Japan and the United States to draw some implications about forming a monetary union in the region. The results suggest that some groups of Asian NIEs plus the United States will be potential candidates to form a monetary union. Mainland China is not suggested as a member country of a monetary union with any of the grouped economies. More interestingly, the ASEAN countries alone are not a feasible group to form a monetary union unless Japan is included, which has important implications for the role of Japan towards the formation of a regional monetary union.

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Article provided by Elsevier in its journal Mathematics and Computers in Simulation (MATCOM).

Volume (Year): 79 (2009)
Issue (Month): 9 ()
Pages: 2927-2937

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Handle: RePEc:eee:matcom:v:79:y:2009:i:9:p:2927-2937
Contact details of provider: Web page: http://www.journals.elsevier.com/mathematics-and-computers-in-simulation/

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  1. Michel Beine & Bertrand Candelon & Alain Hecq, 2000. "Assessing a Perfect European Optimum Currency Area: A Common Cycles Approach," Empirica, Springer, vol. 27(2), pages 115-132, June.
  2. Zhaoyong Zhang & Kiyotaka Sato & Michael McAleer, 2004. "Is a monetary union feasible for East Asia?," Applied Economics, Taylor & Francis Journals, vol. 36(10), pages 1031-1043.
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