A Monetary Union in East Asia: What does the Common Cycles Approach Tell?

There is controversy about whether a monetary union is feasible in the East Asian region. Amongst the criteria for establishing a monetary union, most of the existing studies focus on the symmetric issue of fundamental shocks and the extent of correlations by applying the Blanchard and Quah (1989) structural vector autoregression (VAR) technique, which includes the firstdifferenced variables in the model and examines only bilateral relationships. When forming a monetary union, the member countries need to renounce their monetary policy autonomy. If shocks to respective economies are symmetric, the cost of relinquishing the discretionary monetary policy is likely to be outweighed by the benefits of establishing a common currency. In contrast, if shocks are asymmetric, it will be more costly to give up the autonomous monetary policy and, hence, to establish a monetary union. However, the shock symmetry does not necessarily mean the comovements of the real output variables (common business cycles) between the countries concerned are present.