THE PROSPECTS OF AN ASIAN MONETARY UNION

Abstract

The objective of this paper is to examine the prospects of a monetary union in East Asia. Using the various criteria established by the theory of optimum currency areas, we attempted to investigate if East Asia fulfilled the requirements for a monetary union. In this paper, we argue that the low level of intra-regional labor mobility, intra­ regional trade and the relatively frequent occurrence of asymmetric shocks between the East Asian countries provide little economic justification for the formation of a monetary union in East Asia. From the experience of the European Monetary Union, it is argued that political commitment plays an important role in the formation and the success of a monetary union. Based on the lack of formalized institutions in East Asia and the fragile political ties between some East Asian economies, we argue that the political will to create a more integrated Asia is lacking in East Asia. This paper also discusses the feasibility of a common basket peg in East Asia. Thus, from both economic and political perspectives, the formation of an Asian Monetary Union does not seem to be desirable at present because the formation of such monetary union is likely to result in more costs than benefits.