Optimum Currency Areas in East Asia: A Structural VAR Approach

Abstract

This article empirically assesses the suitability of the East Asian economies for a regional monetary arrangement, on the basis of their symmetry in macroeconomic disturbances, as satisfying one of the preconditions for forming an Optimum Currency Area. Specifically, the Structural Vector Autoregression (VAR) approach is considered in discovering the incidences of transitory and permanent shocks, as a tentative way of identifying potential candidates for monetary union. Owing to East Asia's differing economic circumstances and development, a practical approach towards regional monetary integration would be to begin with smaller sub-groupings. The preliminary findings of this study suggest that there exists scope among selected groups of East Asian economies for potential monetary integration. The implication is that smaller sub-groupings could eventually culminate in a single currency area, subject to the fulfilment of the necessary preconditions and harmonization requirements.