Optimal currency area: An empirical study on selected East Asian economies

Haihong Gao ()
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Haihong Gao: Institute of World Economics and Politics, Chinese Academy of Social Sciences, Beijing 100732, China

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2007, vol. 2, issue 4, 594-606

Abstract: This paper empirically examines the potential for forming an Optimal Currency Area (OCA) in selected Asian economies, including ASEAN countries, China, Japan and Korea, by testing Generalized Purchasing Power Parity (G-PPP) using Johansen's cointegration approach. We investigate the long-term real exchange rate of six sub-groups of countries in order to find whether they share the common stochastic trend, as in an OCA, predicted by the G-PPP theory. The date set is monthly based between 1994 and 2003. We find that five sub-groups out of the six in total appear to have significant evidence of the existence of OCAs. This finding reflects the fact that those economies are actually highly integrated and interrelated to each other, and the current regional monetary arrangement (such as, the Chiang Mai Initiative (CMI)) is far lagging behind the real economic link in East Asia.

Keywords: optimal currency area (OCA); generalized purchasing power parity (G-PPP); real exchange rate; East Asian economies (search for similar items in EconPapers)
JEL-codes: F31 F36 F41 (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:fec:journl:v:2:y:2007:i:4:p:594-606

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