Is East Asia an optimum currency area? Evidence from the application of various OCA criteria.

There have been studies applying an OCA criteria to East Asia, Bayoumi and Eichengreen (1994), Eichengreen and Bayoumi (1999), Goto and Hamada (1994), and Kwan (1998), have focused largely on evaluating the economic conditions for regional monetary integration in East Asia. Many of their studies find that at least some of the Asian countries meet major OCA criteria. Recently, Ng (2002) and Zhang, Sato and McAleer (2004) apply a three variable structural VARs to assesses the feasibility and desirability of a common currency arrangement in East Asia. The results of their studies reach a similar conclusion to those of Yuen (2000). However, the results of previous studies mainly depend on a limited number of OCA criteria to find out reliable candidates to form a monetary. This study is differentiated from previous studies on applying OCA to form a monetary union in East Asia in two respects. First, the previous studies typically focused on the evaluation with just a few criteria, which were too restrictive and potentially misleading and they also could not reach the economic condition on structural change after Asian crisis. Instead, this study covers more than ten OCA criteria to figure out whether East Asian countries are plausible candidates for forming a monetary union in the region and extends the periods that cover structural change after Asian crisis. Second, this study presents a guideline for a step-by-step strategy to form a monetary union within the East Asia region by using Composite Index of OCA criteria. Our results suggest three groupings of East Asian countries---EA 3 (Malaysia, Singapore and Hong Kong) or EA 5 (Malaysia, Singapore, Hong Kong, Thailand and Taiwan) or EA 6 (Malaysia, Singapore, Hong Kong, Thailand, Taiwan and Brunei)---are better poised for deeper monetary integration.