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Economic Feasibility Of Establishing Optimum Currency Areas In East Asia

Posted on:2008-10-10Degree:DoctorType:Dissertation
Country:ChinaCandidate:X Y CuiFull Text:PDF
GTID:1119360272466632Subject:Quantitative Economics
Abstract/Summary:PDF Full Text Request
Against the background of growing economic globalization, how to select a feasible mode and development route for East Asia monetary cooperation in the future becomes more and more importmant, thus making it deserve more and more concern and consideration. And in the aftermath of the financial crisis in 1997, East Asia has come to realize that the absence of the cooperative monetary and exchange rate arrangement will make the regional economic development unstable. Countries and areas in this region have been pondering how to select the proper scope and pattern of monetary cooperation to make their own and regional economy develop cohesively while be able to remain the regional financial system stable without hurting any countries'interest on the background of an increasingly tighter trade relationship and closer investment linkage and more and more free capital movement among the region.Based on the theory of Optimum Currency Areas, this dissertation probes the feasibility of establishing an optimum currency area in East Asia in an economic perspective.Under the guidance of Hamada and Fukuda theoretical model, the costs and benefits under the uncertainty of monetary policy coordination in East Asia are first analyzed in the perspective of game theory. And the necessity and the costs and benefits of China's participation in the optimum currency area are also analyzed in this part. Then we examine the feasibility of establishing an optimum currency area in East Asia in three perspectives respectively: the simultaneity of economic shocks in intra-East Asia, the corelationship between trade and co-movement of international business cycles and the interdependence of the monetary policy.In the perspective of simultaneity of intra-East Asian economic shocks, a four-variable structural VAR model is employed to analyze the simultaneity of shocks, the size of shocks and the impulse pattern of the real effective exchange rate to the various potential shocks in detail with EMU adopted as benchmarks in this dissertation. And the empirical results suggest that it is not appropriate to establish a single optimum currency area in the whole region for East Asia. However, it is feasible to establish sub-optimum currency areas first and then expand gradually to cover broader regions with more and more members absorbed and the economy integration in East Asia.In the perspective of relationship between trade intensity and the co-movement of international business cycles, the endogeneity hypothesis of optimum currency areas theory is employed to examine the bilateral relationship among East Asia. And we find that the positive relationship is significant and the coefficient is smaller than that in EMU, which suggests that it is not appropriate to establish a single optimum currency area in East Asia although it satisfies the needs of dynamic restriction.In the perspective of monetary policy interdependence, the research of the feasibility of establishing the optimum currency areas in East Asia indicates that the intra-Asian cross-country monetary policy interplay appears to be non-cooperative, which implies that the adoption of an optimum currency area in the whole region is not recommended.All of the above empirical analyses in three different perspectives lead to the concluding results that it is desirable for East Asia to establish sub-optimum currency areas, although it is not appropriate to establish an optimum currency area like that in EMU at present in the economic foundations only. Because a tighter intra-East Asian trade relationship will probably lead to more symmetric business cycles, it is conceived that the scope of these sub-optimum currency areas will expand and hence to a wider region with the integration of intra- East Asian trade and economy. China is unable to play a dominant role in establishing optimum currency areas in East Asia whether from the simultaneity of shocks, trade intensity, co-movement of business cycles or monetary interdependence.Based on a synthetical analysis of the previous research and the empirical results, a four-stage strategy for establishing an optimum currency area in East Asia and the exchange rate regime reform arrangement of RMB against this background are provided. And we suggest that China should enhance the public reputation of monetary policy, expand the bilateral and multilateral economic relationship with members of East Asia, extend the investment scope and perfect the domestic financial mechanisms and RMB's exchange rate formation mechanism in order to improve the status in East Asian monetary cooperation.
Keywords/Search Tags:Optimum Currency Area, Economic Shocks, Trade Intensity, Business Cycle, Monetary Policy Interdependence
PDF Full Text Request
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