On The East Asian Mo Netary Unio N: An “Var” Analysis

Author(s)

Marco Mele ,

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Volume 1 - August 2012 (08)

Abstract

The Asian financial crisis of 1997, progressive economic integration into the world system of countries such as China and India, the introduction of the euro in the European continent and the most recent financial crisis of "subprime" mortgages, collectively constitute the factors that have contributed over the years to search more and more regulated economic relations between the countries of South-East Asia. The Asian financial crisis of 1997, progressive economic integration into the world system of countries such as China and India, the introduction of the euro in the European continent and the most recent financial crisis of "subprime" mortgages, collectively constitute the factors that have contributed over the years to search more and more regulated economic relations between the countries of SouthEast Asia. In fact, this kind of trade regionalism, would be enriched and concluded when, following the example of the European Monetary Union, the Pacific Rim countries were united under a single currency (although this situation would result in costs such as-the most important-the reduction of monetary sovereignty in favor of a supra-national organism). The theory that studies by the end of the sixties the costs and benefits of a monetary union is that developed by Robert Mundell-later expanded to other contributions-the "optimum currency areas”. It identifies how the cost for future members of the monetary union is bigger than the increase in the risk of asymmetric shocks and less when they are exposed to the possibility of being subjected to the same or similar shock. The asymmetry is reduced by the degree of trade integration between countries (McKinnon), the level of mobility of labor and possible systems of intra-regional fiscal transfers. This study, examining a specific area of South East Asia, will focus on the symmetry of the structural shocks considering it as a precondition for forming an OCA. In particular, we will carry out a VAR to several variables in order to identify, through the function "impulse-response", the time required to a hypothetical asymmetric shock to be distributed among all the countries in the area.

Keywords

Optimum Currency Area, Trade integration, Gravity Equation, S-VAR. 

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