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An analysis of East Asian currency area: Bayesian dynamic factor model approach

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  • Toan Nguyen

Abstract

There has recently been an increasing interest in the establishment of a common currency area in East Asia in the aftermath of the East Asian financial crisis. In this article I examine the desirability and feasibility of forming a currency area in the region by checking the symmetry of shocks as an important criterion of the theory of Optimum Currency Area. I employ a dynamic factor model to decompose aggregate output into world, regional and country-specific components and estimate the model using a Gibbs sampling simulation. Persistent properties of those components are examined and variance decomposition analysis is performed to investigate the role of each component in output variance. The European Monetary Union, with the successful launch of the euro, is the natural benchmark for comparison. Based on variance analysis, it is found that East Asian countries, on average, are less plausible candidates for a currency area than European counterparts. However, a subgroup of countries in East Asia is as qualified as those in Europe. Given the ongoing integration in East Asia, it is not premature to prepare for such a currency area in this region.

Suggested Citation

  • Toan Nguyen, 2010. "An analysis of East Asian currency area: Bayesian dynamic factor model approach," International Review of Applied Economics, Taylor & Francis Journals, vol. 24(1), pages 103-117.
  • Handle: RePEc:taf:irapec:v:24:y:2010:i:1:p:103-117
    DOI: 10.1080/02692170903007631
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    References listed on IDEAS

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    1. Junichi Goto, 2002. "Economic Preconditions for Monetary Integration in East Asia," Discussion Paper Series 132, Research Institute for Economics & Business Administration, Kobe University.
    2. James H. Stock & Mark W. Watson, 2005. "Implications of Dynamic Factor Models for VAR Analysis," NBER Working Papers 11467, National Bureau of Economic Research, Inc.
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    Cited by:

    1. de Truchis, Gilles & Keddad, Benjamin, 2013. "Southeast Asian monetary integration: New evidences from fractional cointegration of real exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 394-412.
    2. Shahriar Kabir & Ruhul Salim, 2016. "Can A Common Currency Induce Intra-Regional Trade? The Southeast Asian Perspective," Review of Urban & Regional Development Studies, Wiley Blackwell, vol. 28(3), pages 218-234, November.
    3. Shafighi, Najla & Gharleghi, Behrooz, 2016. "Feasibility of a currency union in East Asia using the five-variable structural vector autoregressive model," Economic Analysis and Policy, Elsevier, vol. 52(C), pages 45-54.

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