Application Of The Optimum Currency Area Theory In The East Asian Monetary Integration

Mundell,a well-known economist, first put forward the theory of Optimum Currency Area(OCA)in 1961 by which he was awarded the Nobel Prize in Economics. In the next several decades, the economists developed the theory and closely related it to the reality. As a good example of the OCA, the European monetary integration made profound impacts in the world. After the East Asian financial crisis in 1997, especially in recent years, with the innovation of the exchange rate mechanism in East Asia, the enhance of economic cooperation in the region and the change in exterior economic circumstances, the economists in China and around the world studied related issues and make some big progress. To examine the problem of East Asia monetary integration, the paper starts with the background and current situation of monetary cooperation in East Asia, then analyses feasibility and pathway of monetary integration in East Asia.The paper is structured as follows: Firstly, I summarize the theory of monetary integration around the world. Secondly, I analyze the feasibility of monetary integration in East Asia in the following three sections: Section 1 analyzes the index of convergence within East Asia; In section 2, we discuss the costs and benefits of establishing monetary union in East Asia. Section 3 specifies the difficulties and obstacles of monetary integration in East Asia. Thirdly, on the basis of prior analysis, I review the process of monetary cooperation in East Asia and conclude that monetary cooperation is still in the discussion phrase, far from the mature monetary cooperation mechanism. So the feasible monetary integration in East Asia might be in the form of a multiple-currency union. Finally, as one of the largest economic and political countries in East Asia, China should help accelerate the process of monetaryintegration in East Asia.The main viewpoints and conclusions of the paper are as follows:1. Compared with the current situation of the economic development in East Asia, the EMU's experience suggests that East Asia is not so far away from the standard of the OCA. After evaluating benefits and costs of monetary cooperation in East Asia, I conclude that the benefits might be much greater than the costs. Thus, the key to realize successful monetary integration in East Asia is determined by the participant countries'determination and volition. If China and Japan can work together to make a good example to other countries in East Asia, it might help solve most of the problems.2. Monetary cooperation in East Asia is still in the tentative phrase. Therefore, it still has a long way to go.3. East Asian monetary cooperation has not made much progress in the whole region although it has a big progress in some areas. As for the second-level regional scope, some East Asian countries satisfy the standards of the OCA. So I propose that multiple-currency union might be a more feasible way for East Asia. That is, we may first establish some regional currency areas, and then extend those areas to the whole East Asia to form a single currency area.4. As one of the largest economical and political countries in East Asia, China should be actively involved in East Asian monetary cooperation and play an important role in this process.