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Contents Introduction

This paper assesses the empirical suitability of the East Asian economies for potential monetary integration. The structural vector autoregression (VAR) method is employed to identify the underlying shocks using a three-variable VAR model across the East Asian economies. We use the estimates of the EEC as a benchmark to compare the size of the underlying shocks and the speed of adjustment to shocks in both regions to determine the feasibility of an optimum currency area (OCA) in East Asia. The empirical results do not display strong support for forming an OCA in the East Asian region. The results do imply, however, that some small sub-regions are potential candidates for OCAs, since their disturbances are correlated and small and these economies adjust rapidly to shocks.