Feasibility of a currency union in East Asia using the five-variable structural vector autoregressive model

Abstract

Following the closer monetary cooperation among East Asian countries in recent years, this paper empirically investigates the feasibility of forming a currency union in the region by examining the symmetry of underlying shocks for the most recent period (post-crisis 1999–2013) and by testing the level of correlation of the shocks. Using a five-variable structural vector autoregressive model, we identify various types of shocks in ten East Asian economies. An impulse response function and variance decomposition of shocks are used to identify the size, speed of adjustments to the shocks, and the root cause of variability in macro variables. Empirical analysis suggests the capacity of Indonesia, Japan, Hong Kong, Korea, Malaysia and the Philippines to participate in a common currency area.