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A currency union or an exchange rate union: evidence from Northeast Asia


  • Jeon, Bang Nam
  • Zhang, Hongfang


This paper examines whether or not Northeast Asia economies, namely, China, Japan, Korea, and Taiwan, can form a currency union, where a single currency and a uniform monetary policy are adopted, or an exchange rate union where all the currencies are pegged to an internal or external currency or an optimum currency basket. The analysis of correlations of supply shocks, exchange rate shocks, monetary shocks, and demand shocks, which are estimated applying the structural VAR model with identification restrictions imposed, to the data for the period from 1970 through 2004, shows that shocks of these economies are not symmetric, in general, implying that the Northeast Asian economies are not ready yet to form a common currency union. However, it is found that the Northeast Asian countries can form an exchange rate union with a major currency basket, which consists of the U.S. dollar, the euro and the Japanese yen, as an anchor currency. The paper also examines the option of pegging to a basket of regional currencies, similar to the Asian Currency Unit (ACU), and discusses policy implications.

Suggested Citation

  • Jeon, Bang Nam & Zhang, Hongfang, 2007. "A currency union or an exchange rate union: evidence from Northeast Asia," MPRA Paper 36622, University Library of Munich, Germany, revised 01 Feb 2012.
  • Handle: RePEc:pra:mprapa:36622

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    References listed on IDEAS

    1. McKinnon, Ronald I & Pill, Huw, 1999. "Exchange-Rate Regimes for Emerging Markets: Moral Hazard and International Overborrowing," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 19-38, Autumn.
    2. Yin-Wong Cheung & Jude Yuen, 2004. "An Output Perspective on a Northeast Asia Currency Union," CESifo Working Paper Series 1250, CESifo Group Munich.
    3. 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.
    4. Larrain Felipe & Jose Tavares, 2003. "Regional Currencies Versus Dollarization: Options for Asia and the Americas," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 6(1), pages 35-49.
    5. Kawai, Masahiro & Takagi, Shinji, 2000. "Proposed strategy for a regional exchange rate arrangement in post-crisis East Asia," Policy Research Working Paper Series 2503, The World Bank.
    6. Zhaoyong Zhang & Kiyotaka Sato, 2008. "Whither A Currency Union in Greater China?," Open Economies Review, Springer, vol. 19(3), pages 355-370, July.
    7. Karras, Georgios, 2005. "Is there a yen optimum currency area? Evidence from 18 Asian and Pacific economies," Japan and the World Economy, Elsevier, vol. 17(4), pages 456-469, December.
    8. Chow, Hwee Kwan & Kim, Yoonbai, 2003. "A common currency peg in East Asia? Perspectives from Western Europe," Journal of Macroeconomics, Elsevier, vol. 25(3), pages 331-350, September.
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    Cited by:

    1. Click, Reid W., 2009. "The ASEAN dollar standard in the post-crisis era: A reconsideration," Journal of Asian Economics, Elsevier, vol. 20(3), pages 269-279, May.
    2. Jeon, Bang Nam, 2012. "From the 1997-98 Asian financial crisis to the 2008-09 global economic crisis: lessons from Korea’s experience," MPRA Paper 36469, University Library of Munich, Germany.
    3. Chen, Xiaofen, 2012. "The dampening effect of bank foreign liabilities on monetary policy: Revisiting monetary cooperation in East Asia," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 412-427.

    More about this item


    currency union; exchange rate union; optimum currency areas; Northeast Asia;

    JEL classification:

    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration


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