IDEAS home Printed from https://ideas.repec.org/p/hkm/wpaper/192009.html
   My bibliography  Save this paper

Revisiting the Shocking Aspects of Asian Monetary Unification

Author

Listed:
  • Hans Genberg

    (Hong Kong Institute for Monetary Research, Hong Kong Monetary Authority)

  • Pierre L. Siklos

    (Wilfrid Laurier University, Viessmann European Research Centre, Hong Kong Institute for Monetary Research)

Abstract

This paper revisits the question whether economies in Asia are likely to be good candidates for pursuing similar exchange rate policies and ultimately joining together in a monetary union. A number of authors have investigated this question before typically using some variant of the methodology originally used by Bayoumi and Eichengreen (BE) to study the same question for countries that were potential candidates to form common currency area in Europe. It is the contention of this paper that this methodology is flawed because it fails to identify properly the aggregate demand and aggregate supply shocks in each economy and hence cannot adequately address one of the central issues in determining the suitability of two or more countries joining a monetary union. To remedy this deficiency in the existing literature we propose an alternative methodology to identify structural shocks. We will therefore be able to revisit the debate about monetary integration in Asia based on more solid empirical foundations. The results show that these modifications do matter for the cross-country correlation of these shocks. In particular, aggregate demand shocks among the relatively smaller economies of Asia appear to be more highly correlated with the larger or more advanced economies in the regions such as Korea, Hong Kong, Singapore, and Japan, than they are amongst themselves when we rely on the standard BE methodology. When an alternative approach is used we conclude, for example, that aggregate supply shocks remain most highly correlated between China, Hong Kong and the remainder of the economies in our sample while Japan and Singapore, most notably, seem more ¡¥disconnected¡¦ with the rest of the region. Taking explicit account of foreign shocks not only prevents them from erroneously being confounded with domestic shocks as in the conventional methodology, it also makes it possible to evaluate the desirability of a common monetary policy response to common external shocks. Our results show that this can have an important bearing on assessing the desirability of forming a monetary union among the economies in the region. With respect to the implications for monetary unification in Asia our results do not clearly identify a group of countries for which shocks are unambiguously highly correlated and which therefore would be able to perform well with a common monetary policy.

Suggested Citation

  • Hans Genberg & Pierre L. Siklos, 2009. "Revisiting the Shocking Aspects of Asian Monetary Unification," Working Papers 192009, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:192009
    as

    Download full text from publisher

    File URL: http://www.hkimr.org/uploads/publication/129/ub_full_0_2_213_wp-no-19_2009.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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 655-673, September.
    2. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16.
    3. Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521466004.
    4. Michael G. Plummer & Ganeshan Wignaraja, 2006. "The Post-Crisis Sequencing of Economic Integration in Asia: Trade as a Complement to a Monetary Future," Economie Internationale, CEPII research center, issue 107, pages 59-85.
    5. Sunghyun Henry Kim & M. Ayhan Kose & Michael G. Plummer, 2003. "Dynamics of Business Cycles in Asia: Differences and Similarities," Review of Development Economics, Wiley Blackwell, vol. 7(3), pages 462-477, August.
    6. Souki, Kaouthar, 2008. "Assessing the effects of U.S. shocks on the Canadian economy using alternative identification methods," The North American Journal of Economics and Finance, Elsevier, vol. 19(2), pages 193-213, August.
    7. John Williamson, 2005. "A Currency Basket for East Asia, Not Just China," Policy Briefs PB05-01, Peterson Institute for International Economics.
    8. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
    9. Obiyathulla Ismath Bacha, 2008. "A common currency area for ASEAN? issues and feasibility," Applied Economics, Taylor & Francis Journals, vol. 40(4), pages 515-529.
    10. PierreL. Siklos & Yang Zhang, 2010. "Identifying The Shocks Driving Inflation In China," Pacific Economic Review, Wiley Blackwell, vol. 15(2), pages 204-223, May.
    11. Pomfret, Richard, 2005. "Sequencing trade and monetary integration: issues and application to Asia," Journal of Asian Economics, Elsevier, vol. 16(1), pages 105-124, February.
    12. Bernanke, Ben S., 1986. "Alternative explanations of the money-income correlation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 49-99, January.
    13. Carsten Hefeker & Andreas Nabor, 2005. "China's role in East-Asian monetary integration," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(2), pages 157-166.
    14. 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.
    15. Vansteenkiste, Isabel & Dées, Stéphane, 2007. "The transmission of US cyclical developments to the rest of the world," Working Paper Series 798, European Central Bank.
    16. Moneta, Fabio & Rüffer, Rasmus, 2006. "Business cycle synchronisation in East Asia," Working Paper Series 671, European Central Bank.
    17. Walter Enders & Stan Hurn, 2007. "Identifying aggregate demand and supply shocks in a small open economy," Oxford Economic Papers, Oxford University Press, vol. 59(3), pages 411-429, July.
    18. Ramikishen Rajan, 2002. "Exchange Rate Policy Options for Post-crisis Southeast Asia: Is There a Case for Currency Baskets?," The World Economy, Wiley Blackwell, vol. 25(1), pages 137-163, January.
    19. Masahiro Kawai, 2008. "Toward A Regional Exchange Rate Regime In East Asia," Pacific Economic Review, Wiley Blackwell, vol. 13(1), pages 83-103, February.
    20. Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521460477.
    21. 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.
    22. repec:rim:rimwps:34-07 is not listed on IDEAS
    23. Cover, James Peery & Enders, Walter & Hueng, C. James, 2006. "Using the Aggregate Demand-Aggregate Supply Model to Identify Structural Demand-Side and Supply-Side Shocks: Results Using a Bivariate VAR," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 777-790, April.
    24. Hans Genberg & Dong He, 2007. "Monetary and Financial Cooperation among Central Banks in East Asia and the Pacific," Working Papers 0715, Hong Kong Monetary Authority.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Emilio Espino & Julian Kozlowski & Juan M. Sánchez, 2013. "Regionalization vs. globalization," Working Papers 2013-002, Federal Reserve Bank of St. Louis.
    2. Fidrmuc, Jarko & Korhonen, Iikka, 2015. "Meta-analysis of Chinese business cycle correlation," BOFIT Discussion Papers 6/2015, Bank of Finland, Institute for Economies in Transition.
    3. Dufrénot, Gilles & Keddad, Benjamin, 2014. "Business cycles synchronization in East Asia: A Markov-switching approach," Economic Modelling, Elsevier, vol. 42(C), pages 186-197.
    4. 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.
    5. Hideaki Hirata & M. Ayhan Kose & Chris Otrok, "undated". "Regionalization vs. Globalization," Working Paper 164456, Harvard University OpenScholar.
    6. Dong He & Wei Liao, 2012. "Asian Business Cycle Synchronization," Pacific Economic Review, Wiley Blackwell, vol. 17(1), pages 106-135, February.
    7. Hamilton-Hart, Natasha, 2011. "Distribution, Domestic Politics and Monetary Cooperation in East Asia," ADBI Working Papers 332, Asian Development Bank Institute.
    8. Bashar, Omar H.M.N., 2012. "The dynamics of aggregate demand and supply shocks in ASEAN countries," Journal of Asian Economics, Elsevier, vol. 23(5), pages 507-518.
    9. Hans Genberg, "undated". "Financial Integration in ASIA," Working Papers wp22, South East Asian Central Banks (SEACEN) Research and Training Centre.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hkm:wpaper:192009. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (HKIMR). General contact details of provider: http://edirc.repec.org/data/hkimrhk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.