The suitability of a monetary union in East Asia: What does the cointegration approach tell?

The issue of whether or not to form a monetary union in East Asia remains a hot issue in the study of the East Asian economies. Most of the existing studies apply a framework focusing on the symmetric issue of the fundamental shocks and the extent of correlations by applying the Blanchard and Quah [O.J. Blanchard, D. Quail, The dynamic effects of aggregate demand and supply disturbances, American Economic Review 79 (1989) 655-673] structural vector autoregression (VAR) technique, which includes first-differenced variables in the model and examines only the bilateral relationships. However, the shock symmetry does not necessarily require the co-movements of the real output variables between the countries concerned. The present paper employs the Johansen [S. Johansen, Statistical analysis of cointegration vectors, Journal of Economic Dynamics and Control 12 (1988) 231-254] cointegration approach to check the long-run co-movements of real outputs among the East Asian countries, Japan and the United States to draw some implications about forming a monetary union in the region. The results suggest that some groups of Asian NIEs plus the United States will be potential candidates to form a monetary union. Mainland China is not suggested as a member country of a monetary union with any of the grouped economies. More interestingly, the ASEAN countries alone are not a feasible group to form a monetary union unless Japan is included, which has important implications for the role of Japan towards the formation of a regional monetary union. (c) 2008 IMACS. Published by Elsevier B.V. All rights reserved.