An East Asian currency union? The empirical nature of macroeconomic shocks in East Asia

Following Mundell [Mundell, R.(1961). A theory of optimum currency areas. American Economic Review, 51, 657-665], a key pre-condition for the formation of a successful monetary union is that member countries face similar types of shocks for coordinated macroeconomic policy responses, and hence paving the way for a currency union. Using three alternative but largely complementary vector autoregression models, this paper provides a set of further and alternative evidence on macroeconomic shocks across ASEAN plus China, Japan and Korea. I find that macroeconomic shocks are quite heterogeneous in this region, as much so across China, Japan and Korea as even within the ASEAN group. An East Asian currency union seems premature judging by the nature of macroeconomic shocks. (C) 2007 Elsevier Inc. All rights reserved.