After the global financial crisis, it has
become more recognized that the policy dialogues among both emerging and
advanced economies on the exchange rate is necessary to prevent competitive
devaluation.
In this
context, East Asian countries should also choose an adequate exchange rate
system. However, there still exists a variety of exchange rate regimes in this
area, which might suggest a possibility of coordination failure.
To
avoid this, the establishment of stable exchange rate linkages and the
enhancement of monetary policy credibility in East Asia are needed. These
discussions on common regional exchange rate policy are often related to the
“Optimum Currency Area (OCA) theory” because stabilized exchange rates in the
global economies are only assured by a “one size fits all” monetary policy in
the end.
Hence,
the main purpose of this paper is to investigate whether East Asian
countries—ASEAN5, China, Korea, and Japan—have developed into matching an OCA
in recent years or not. While developing the earlier generalized purchasing
power parity (G-PPP) model into an up-to-date non-linear econometric model and
considering the adoption of the Asian monetary unit (AMU) into this area, this
paper could have positive empirical results which suggest for forming a common
currency in East Asia.
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