Feasibility of Currency Union Formation in East Asia

Abstract

Experiencing two global financial crisis, countries in East Asia were aware of the importance of shaping its economic structure based on a high degree of cooperation by means to alleviate from the aftermath of unexpected external economic shocks. Based on this background, there were studies on whether East Asia was possible to form a common currency zone, like the European Union, which to cooperate at the regional level by estimating the value of OCA index among East Asian countries and evaluating the advantages and disadvantages under such cooperation. By assessing the value of OCA index of East Asian countries versus possible anchor currency to have external peg if the group were to form a common currency zone, this paper is aim to see mainly three things. Firstly, to check East Asia economies are in a favorable condition in forming the currency union zone by analyzing OCA Index from 1995 to 2015. Secondly, to see whether the countries were to form a common currency zone, which currency would be more favorable to become the common external peg. Lastly, by including financial sector variables, how would the OCA index be different from that of previous studies. Overall, the findings show that the value of OCA index versus the United States, China and Japan with East Asian economies showed decreasing trend while United States and China were a relatively more favorable candidate to become anchor currency if East Asia is to form a currency union.