Eclectic View of Optimum Currency Area in East Asia

Asian crises in 1997 has drawn attention of policy makers in this region to seriously consider a new financial architecture that will help them collectively withstand rapid movements of funds and external shocks. One possible solution is adopting either end of exchange rate regime spectrum. The introduction of euro currency in 1999 set the example of irrevocable fixed exchange rate and posed an interest question as to whether other regions in the world are optimum currency area. Some studies concluded that the answer is positive for East Asia.

However, unlike Euro member countries, East Asian countries have vast differences in many aspects, be they level of income, structure of economy, area of specialization, and, more importantly, level of financial development. Had they forged to integrate without a careful consideration of possibility based on economic ground, it would risk future sustainability. The first chapter of this study is the critical review of the methodology used in existing OCA literature on East Asia. Then, the second chapter will assess the feasibility and desirability of forming a currency union in this region by proposing an alternative OCA criterion, namely, a correlation of GDP growth in the periods that are longer than one year. Because such measure embeds the trend, the information discarded in annual growth correlation, it can have implication on the monetary policy in two ways. One is the rate of money supply growth that accommodates the output growth. The other is the Balassa-Samuelson effect in the real sector. The study will also have a short discussion about the automatic stabilizer and risk sharing in the context that they eliminate the need to use the policy to address short run disequilibrium.

There will one chapter that examines the trade effect following endogenous OCA by learning from the evidence of euro countries. The study will attempt to measure this effect in the reverse direction, that is, in the case of monetary disintegration as a result of political dissolution. Finally, the last chapter will draw the conclusion of implications of earlier chapter and suggest the monetary cooperation in the light of OCA theory.

Orawan Permpoon