Is East Asia An Optimum Currency Area?

This paper assesses the empirical suitability of the East Asian economies for potential monetaryintegration. The structural vector autoregression (VAR) method is employed to identify the underlying shocksusing a three-variable VAR model across the East Asian economies. We use the estimates of the EEC as abenchmark to compare the size of the underlying shocks and the speed of adjustment to shocks in both regions todetermine the feasibility of forming an optimum currency area (OCA) in East Asia. The empirical results do notdisplay strong support for forming an OCA in the East Asian region. The results do imply, however, that somesmall sub-regions are potential candidates for OCAs, since their disturbances are correlated and small and theseeconomies adjust rapidly to shocks.