Real Effects of Common Currencies in East Asia

Kazuko Shirono

No 2007/166, IMF Working Papers from International Monetary Fund

Abstract: Since the 1997 Asian currency crisis, new interest has emerged in the formation of a common currency area in East Asia. This paper provides estimates of trade and welfare effects of East Asian currency unions, using a micro-founded gravity model. Counter-factual experiments to assess the effects of various hypothetical currency arrangements for East Asia suggest that an East Asian currency union will double bilateral trade in the region, but the resulting welfare effects will be moderate. However, if Japan, a major trade partner for East Asia, is included in the union, welfare effects increase substantially. The evidence thus suggests that certain regional currency arrangements in East Asia will stimulate regional trade rigorously and can generate economically significant welfare gains.

Keywords: WP; currency union; common currency; exchange rate; East Asia; Gravity Model; currency arrangement; arrangement in East Asia; trade cost; trade-creating effect; trade-creating effect of a currency union; common currency area; common currency arrangement in East Asia; currency union effect; trade aspect of currency union; trade effect; welfare effect; Monetary unions; Currencies; Plurilateral trade; Exchange rate arrangements; Trade barriers; Australia and New Zealand (search for similar items in EconPapers)
Pages: 23
Date: 2007-07-01
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