Monetary Integration in East Asia: An Empirical Approach

This paper investigates empirically the economic feasibility of monetary integration in East Asia. A structural VAR model is employed to decompose real output, real exchange rate and price level into a lagged polynomial of supply, demand and monetary shocks. The shocks are identified through the imposition of long-run restrictions, which are extracted from a version of Clarida and Gali’s (1994) model extended in this paper to encompass the Balassa-Samuelson-effect. Once identified, the shocks are used to construct indicators relevant to monetary integration. Using the Euro-11 countries as benchmark, the overall results suggest that East Asian countries fulfil reasonably well the criteria looked at.