Are currency areas feasible in East Asia? A benchmarking approach

Abstract

This paper evaluated the feasibility of optimum currency areas (OCAs) in East Asia by benchmarking the characteristics of 16 East Asian economies and India against those of the dollarized countries and the European Economic and Monetary Union (EMU), according to criteria that are most frequently studied in OCA literature, namely synchronization in real business cycle, volatility in real exchange rate, and synchronization in real interest rate cycle. Backed by literature, the U.S. dollar was set to be the reference currency. Data series were divided into different time periods to capture different economic circumstances. A ‘dynamic’ benchmarking technique was used to ensure robustness of results. Results suggested that the region as a whole does not constitute an OCA at the moment. Nonetheless, a subregional union of a high potential ‘Southeast Asian’ bloc was put forward. Results serve to be an important reference for both public and private policymakers on matters pertaining to regionalization and international business management.        Key words: Asia, regionalization, monetary union, optimum currency area, OCA, business cycle, dollarization, exchange rate, interest rate, integration.