Monetary Integration in East Asia: Evidence from Real Effective Exchange Rates

Abstract

This paper investigates the feasibility of forming a monetary union in East Asia by examining the cointegration and causality of the real effective exchange rates of local currencies. A “pentagon” group of five countries is found - South Korea, the Philippines, Thailand, Indonesia, and Malaysia - which may have potential for success for further monetary integration. Singapore is loosely tied to this group. The Greater China area - China, Hong Kong and Taiwan - does not show any significant degree of integration either internally or externally. Neither a yen bloc nor a US dollar bloc is forming in East Asia.