Is the proposed East African Monetary Union an optimal currency area? a structural vector autoregression analysis

This paper empirically assesses the suitability of the East African (EA) countries for a regional monetary union by testing for symmetry of the underlying structural shocks. The results indicate that supply and demand shocks are generally asymmetric, which does not lend strong support for forming a currency union in the EA region at the moment. However, the speed and magnitude of adjustment to shocks is similar across the countries. Therefore, further integration of the economies might lead to more favorable conditions for a monetary union. Although evidence in favor of linking an EA currency to an external anchor is weak, such support seems to favor the Euro.     

Is a Common Currency Area Feasible for East Asia? A Multivariate Structural Vector Autoregression Approach

In this paper the feasibility of forming a common currency area in East Asia is investigated. A three‐variable structural vector autoregression model is used to identify three types of shocks: global, regional and domestic shocks. The empirical results show that in the post‐crisis period the importance of asymmetric domestic shocks has declined sharply, whereas that of symmetric global and regional shocks has increased. Furthermore, although a ‘prevalent shock’ cannot be uniquely defined, most East Asian economies respond to global and regional shocks in a symmetric way. Although the findings do not provide strong support for forming a common currency area in this region at the current stage, they suggest that most East Asian economies have become relatively symmetric in terms of economic shocks and adjustments, implying that a common currency area might become viable through deepening regional integration.     

美元定价、汇率传递与美元贬值对东亚经济的冲击

本文对东亚国家和地区国际商品贸易定价货币的选择进行了考察,分析了东亚汇率传递的特征及美元贬值对东亚经济的影响与冲击,并提出中国的对策。研究发现:美元定价已成为外部冲击向东亚经济传导的重要渠道;美元定价导致美国和东亚之间只存在单向的汇率传递,从而削弱约束美元贬值的内在机制;在美元定价条件下,东亚国家在面对美元贬值对经济的刺激作用时乐观其成,但是在面对美元贬值所带来的"滞胀"冲击时却没有有效的隔离机制。     

美国经济波动对东亚经济的影响

经济全球化使世界经济紧密联系在一起,各国经济也更易受到外部经济冲击的影响。本文考察了美国经济波动对东亚8个开放经济体的影响,结果显示,东亚经济大约有18%的波动来源于美国经济的冲击,这主要是因为美国和东亚保持着紧密的贸易和金融联系。由于各经济体在经济总量、汇率制度安排等方面的差异,造成受美国经济波动的影响也不相同。总体看,这些冲击持续的时间大约在15个季度。     

Reactions to Shocks and Monetary Policy Regimes: Inflation Targeting Versus Flexible Currency Board in Sub‐Saharan Africa

The paper examines the monetary policy actions through which central banks in sub‐Saharan Africa have tried to eliminate the negative impacts of the shocks facing their economies. We compare two different monetary policy regimes: a currency board regime (in the CFA zone) and an inflation targeting policy regime (Ghana and South Africa) when central banks respond to demand, supply, and fiscal shocks. We extend the usual forecasting and policy analysis system models to replicate the economic features of these economies during the period 2002–12 and to evaluate the impact of several policies in response to these shocks. We find that both policies are inappropriate in helping the economies escape from the effects of negative demand shocks, both are essential when negative shocks to primary balance occur, while inflation targeting dominates the currency board regime as a strategy to cope with positive shocks to inflation.     

Welfare Implications of Currency Integration: Labor Mobility and Pricing-to-Market

In this paper, we examine the welfare cost of renouncing monetary policy autonomy in a model that includes labor mobility and pricing-to-market (PTM) behavior in firms. We find that renouncing monetary policy autonomy becomes a cost of currency integration when the consumption basket weights differ between candidate countries and when country-specific total factor productivity (TFP) shocks hit economies, even when the union fulfills the classic optimum currency area theory of labor mobility. We also found that a firm's PTM behavior has a significant effect on the welfare implications of currency integration combined with labor mobility. For instance, currency integration does not produce greater welfare losses in the PTM case (where the labor input weights differ across member countries and asymmetric labor disutility shocks occur), although greater welfare losses arise in the case of producer currency pricing.     

Should East Asia’s currencies be pegged to the yen? The role of invoice currency

Growing concern that a dollar peg exposes East Asian economies to fluctuations in the dollar–yen exchange rate has stimulated research on currency basket regimes as alternatives for these economies. However, existing studies have mostly ignored an important characteristic of East Asia, i.e., most of its international trade is invoiced in the U.S. dollars. This paper investigates how the preponderance of dollar invoicing affects optimal currency basket regimes for East Asian economies. I develop a three-country center-periphery sticky-price dynamic stochastic general equilibrium model for the analysis. The model is solved numerically by taking second-order approximations to the policy functions with the expected lifetime utility of households chosen as the welfare criterion. Contrary to the conjecture of existing literature, I show that predominance of dollar invoicing implies that the dollar should receive a smaller weight than suggested by bilateral trade shares between emerging markets in East Asia and the United States. The results hinge on the interaction of different degrees of pass-through implied by the choice of invoice currency and endogenous responses of monetary policies in the center countries.     

Impact of the US Economic Crisis on East Asian Economies： Production Networks and Triangular Trade through Chinese Mainland

This paper investigates the impact of the 2008 economic crisis on industries in East Asia. It attempts to identify the transmission mechanism and the magnitude of the impact of the crisis on industries in East Asia using the updated Asian international input–output table for 2008. The analyses reveal that the crisis significantly affected industrial output of the nine East Asian economies included in the present study. The economies that are deeply involved in production networks were affected most seriously. Our analyses also show that the impact was transmitted to East Asian industries through triangular trade, in which Chinese mainland imports parts and components from neighboring East Asian economies and then exports final products to the US and EU markets. Although such intricate production networks have improved the competitiveness of East Asian economies, they have also increased vulnerability to external shocks.     

Productivity and Comparative Advantage in Rice Agriculture in South‐East Asia Since 1870*

Rice long dominated the agricultural economies of South‐East Asia. Given the economic predominance of agriculture, the development of rice production had a significant bearing on the economies in the region. This article explains why the countries of mainland South‐East Asia long dominated the international rice market. It quantifies labor productivity in rice production and argues that simple, low‐cost and labor‐extensive, but low‐yielding production technology allowed farmers in mainland South‐East Asia to achieve significantly higher levels of labor product‐ivity than in the more densely populated rice‐producing areas in South‐East Asia and Japan. High levels of labor productivity were a major source of comparative advantage in rice production for Burma, Thailand and Southern Vietnam.     

Whither A Currency Union in Greater China?

The paper attempts to evaluate the prospect of creating a currency union in the “Greater China” economic area. Despite of the political deadlock and military confrontation in the Taiwan Strait, the Greater China area has experienced rapid and spontaneous regional integration in the past decades as a result of increasingly cross-border trade, foreign direct investment (FDI), technology contracts, and other arrangements in accordance with changes in comparative advantage and industrial upgrading in these economies. In this study, we focus on the symmetry in shocks that is perceived as one of the major preconditions of a currency union. In contrast to the previous studies, we investigate the time-varying correlation of supply, REER and monetary shocks by using the Kalman filter technique to assess the dynamic changes in structural similarity and convergence among the Greater China economies. We also examine the costs of forming a currency union in the area due to the loss of monetary autonomy in each economy. Our results suggest that there is a rising structural symmetry between the Greater China economies, and this area has become increasingly a better candidate for a monetary union.

REMITTANCES AND AGGREGATE LABOR SUPPLY: EVIDENCE FROM SIXTY‐SIX DEVELOPING NATIONS

Do remittances reduce labor supply in recipient economies? This paper addresses this question with aggregate level data for a panel of sixty‐six developing countries from the Middle East and Africa, Asia and the Pacific, and Latin America and the Caribbean over the period 1985 to 2005. The results exhibit a positive and significant relationship between remittances and aggregate labor supply. The effect is clearly driven by men in each of the three regions. Three potential explanations are put forward to explain these empirical findings: (1) non‐migrating household members are likely to increase their labor supply in order to defray migration‐related expenses; (2) neighboring households increase their labor supply to help family members migrate after they become more aware of the benefits of remittances; and (3) remittances overcome credit constraints, thus generating employment.     

IS EAST ASIA FIT FOR AN OPTIMUM CURRENCY AREA? AN ASSESSMENT OF THE ECONOMIC FEASIBILITY OF A HIGHER DEGREE OF MONETARY COOPERATION IN EAST ASIA

This paper attempts to make a contribution to the recent search for a suitable assessment of the economic feasibility of a higher degree of monetary cooperation in East Asia. By using a structural vector autoregression approach as well as a generalized purchasing power parity approach, we find that a larger group of appropriately selected East Asian economies does satisfy the macroeconomic conditions for forming an Optimum Currency Area (OCA). The East Asian group consists of four ASEAN countries (Indonesia, Malaysia, Singapore, and Thailand) and four Northeast Asian economies (Hong Kong SAR, Japan, Republic of Korea, and Taiwan). This finding presents a striking contrast to the existing research results whose policy recommendation has generally been that countries in East Asia should start with a smaller subgroup currency area. It is time that many East Asian economies as a region made a serious effort to pursue a higher degree of monetary cooperation among themselves for forming an OCA.     

Output volatility of five crisis-affected East Asia economies

A decade has passed since the Asian financial crisis (AFC) in 1997, and attention is drawn to the output performance of the crisis-affected economies in East Asia. Using the Hodrick–Prescott (HP) filter, this paper examines the growth volatility of GDP, its components and the stock market of five East Asia economies of Japan, Singapore, South Korea, Chinese Taipei and Hong Kong Special Administrative Region (SAR). Empirical evidences based on quarterly data show that output volatility for both Singapore and South Korea has increased after the AFC. For the GDP components, trade is a major factor in lowering GDP volatility in Chinese Taipei. The Hong Kong SAR economy has experienced an increase/decrease in the volatility of investment/private consumption. Among the five East Asia economies, government intervention is obvious in Singapore. The stock markets in both Hong Kong SAR and Chinese Taipei showed stronger ability in absorbing shocks.     

Proposal for a common currency among rich democracies

This paper proposes the creation of a common currency for the industrialized democracies, notably the United States, the European Union, and Japan. A common currency implies a common monetary policy; institutional arrangements for which are discussed. The rationale rests on the assumption that asymmetrical financial shocks will become more important than asymmetrical real shocks for these large, diversified economies, and that one of the growing sources of financial shocks will be changing expectations about exchange rate movements among national currencies. These financial shocks will in turn disturb real economies, such that flexible exchange rates among major currencies will increasingly become sources of shock more than shock absorbers. Such a common currency would also make it much easier for emerging markets to frame their monetary and exchange rate policies.     

东亚汇率合作的现实选择——基于汇率动态性的考察

从理论上看,东亚地区汇率合作有多种形式可以选择,然而,合作选择受制于双边汇率动态性。本文通过东亚主要国家汇率相关性和锚货币的动态性考察,推导出现阶段东亚汇率合作的方案选择,即从非正式的单独钉住货币篮子入手,逐步过渡到正式的共同钉住区域内外货币组成的混合货币篮子,最终的方向是构建东亚共同的由区域内货币组成的货币篮子或者说亚洲货币单位(ACU)。     

Can East Asia rise again?

In recent times, the economies of East Asia have been confronted by two major economic recessions, the first caused by the East Asian financial crisis, and the second by the slump in the ‘new economy.’ The causes of these two recessions, their scope and their influences differ significantly and during these periods of economic downturn the economies affected have adopted various monetary policies aimed at reducing interest rates and tax rates, and pursuing the expansion of government expenditure. However, these policies have obviously not yet been as effective as expected.This paper sets out to determine those factors affecting the possibility of East Asia rising again from the recent economic slump, a slump which has stemmed from excessive investment in the electronics and information industries. The paper begins with an overview of the East Asian economy, with particular reference to the recent serious decline following the steady recovery from the East Asian financial crisis and a review of the measures taken to counter it. Proposals are then made with regard to a number of lessons to be learned from the recent slump.There are three major issues involved in the question of whether East Asia can rise again from the current economic slump. First of all, many of the economies of East Asia have tried their utmost to upgrade their industrial structures from labor- to technology-intensive, or towards a knowledge-based economy and, to some extent, have actually been quite successful in achieving their goals. Secondly, almost all of the East Asian economies have paid particular attention to educational development, with many families having sent their children to foreign countries to receive advanced education in the hope that when they return they can make a substantial contribution to the progress of their home economies—examples of this trend are provided by Taiwan and India. Thirdly, there are abundant natural resources in East Asia along with rich sources of manpower with a hard-working spirit; these two factors can create comparative advantages and strengthen the competitiveness of these economies.In view of the recent developments towards regionalism, it is imperative for the economies of East Asia to form an East Asian Community in the near future, and many of the economies in this region are currently endeavoring to realize this vision, despite many obstacles still facing East Asia which will ultimately need to be overcome.     

External adjustments and coordinated exchange rate policy in Asia

In this paper, we estimate structural VAR models with contemporaneous restrictions based on neo-classical and Keynesian theories to investigate whether the cause of current account surpluses for East Asian economies is a “saving glut” or undervalued currencies. Analytical results show that the major determinant of the current account is the real effective exchange rate for all East Asian countries with the exception of China for which the major determinant is domestic GDP. Accordingly, the recently requested revaluation of the Chinese yuan may not be an effective policy for reducing the Chinese current account surplus, and may affect other Asian current accounts. We also investigate whether a Chinese currency revaluation would contribute to the improvement of current account imbalances in East Asia and find that a revaluation would, indeed, improve the current accounts of Japan, Korea, Indonesia, and Thailand. Since the trade structures of major East Asian countries are substitutes with that of China, a Chinese currency revaluation might not lead to a decrease in East Asian current account surpluses. Coordination of currency policy among East Asian countries is, therefore, needed to solve the global current account imbalance.     

Real effects of common currencies in East Asia

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.     

Trade and the Number of OCAs in the World

This paper employs worldwide data on output and bilateral trade in order to identify optimum currency areas (OCAs) on a global basis. By retaining only two of the many criteria in the literature on OCAs, computer programming could serve to do the identification. The two chosen criteria relate to trade and the symmetry of shocks to output. Based on the first criterion, trade, some large continental OCAs emerge. Adding the second, symmetry, whittles down the size of these OCAs considerably. Nevertheless, some significant examples remain in the Americas, Europe and Asia, of which the European and the Asiatic are the most noteworthy.     

Determinants of bond market development in Asia

One of the major reasons behind the Asian financial crisis in 1997 was the excessive dependence of the Asian economies on commercial banks for domestic financing. The region failed to diversify its sources of corporate financing as it relied mainly on banks since its other types of financing, namely bond markets, were still underdeveloped and their sizes were quite small. On the other hand, the 2008 global financial crisis and the ongoing European debt crisis have led to constraints in acquiring local currency and foreign currency liquidity in the corporate sector in Asia as foreign banks withdrew investments from Asia. Furthermore, Asia needs large long term capital (US$ 750 billion per year for 2010–2020) for developing infrastructure connectivity within and across its economies. Local and regional capital can be channeled for long-term infrastructure projects and other productive investment through bond markets. Having a well-developed local currency bond markets can enhance the resilience of domestic financial sector to external shocks and it can facilitate better intermediation of savings into productive investments in Asia. To enhance corporate bond financing, it is important to examine factors that affect the effective development of bond markets in Asia. The study attempts to identify the determinants of bond market development in Asian economies through examining the relationship of bond issuance with selected key financial and economic factors. It also intends to provide policy recommendations for the further development of the Asian bond market. Major determinants for bond market development in Asia include the size of an economy, the stage of economic development, the openness of an economy, the exchange rate variability, the size of the banking system, and interest rate variability.