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Toan Nguyen, 2008. "East Asian Currency Area: A Bayesian Dynamic Factor
Model Analysis."
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| Abstract: |
| There has been recently increasing interest in the establishment of a common currency area
in East Asia in the aftermath of the East Asian financial crisis. In this paper, we examine the
desirability and feasibility of forming a currency area in the region by checking the symmetry of
shocks as an important criterion of the Theory of Optimum Currency Area. We employ a Dynamic
Factor Model to decompose aggregate output into global, regional and country-specific
components and estimate the model using Gibbs sampling simulation. Persistent properties of
those components are examined and variance decomposition analysis is performed to investigate
the role of each component in output variance. Based on variance analysis, we find that East Asia
countries, on average, are less plausible candidates for a currency area than European counterparts.
However, a subgroup of countries in East Asia are as qualified as those in Europe. Given the
ongoing integration in East Asia, it is not premature to prepare for such a currency area in this
region. |
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