Revisiting the shocking aspects of Asian monetary unification

There is renewed interest in monetary cooperation in Asia. To the extent that such cooperation evolves to include discussions about co-ordination of exchange rate policies it is important to evaluate the desirability of such co-ordination. Such an evaluation involves in part an assessment of the cross-country correlation of macro-economic shocks, a criterion used in the past to assess the desirability of monetary unification. In revisiting this question this paper not only updates previous studies, but it makes two significant methodological contributions to the literature based on estimates of vector autoregression (VAR) models. Our empirical specification allows for the possibility that aggregate demand and aggregate supply shocks are contemporaneously correlated within each economy, on the one hand, and takes explicit account of third-country common influences on each economy, on the other. Our results show that previous findings in the literature do not always hold up when our modelling methodology is applied to the data. With respect to the implications for monetary unification our results do not clearly identify a group of countries for which shocks are unambiguously highly correlated and which therefore would be able to perform well with a common monetary policy. The correlation structure differs between aggregate demand shocks and aggregate supply shocks.