Discussion Paper Series 2014-E-12

How Close is Asia to an Optimal Currency Area in Terms of Business Cycle Co-Movement?

Alicia Garcia-Herrero

The paper assesses how close Asian countries are to an Optimal Currency Area in terms of business cycle synchronization, with a focus on supply shock asymmetry. Based on a Structural VAR model, the importance of symmetric and asymmetric supply shocks is teasted for all ASEAN+3 countries. In addition, a spatial approach is used to analyze its impact on the whole Asian region and on pairs of Asian countries. The conclusion is that there is evidence of increasing symmetry of supply shocks although the situation differs largely on a country by country basis. Such finding would support a multi-speed process of monetary integration in the region.

Keywords: Business cycle synchronization; Optimal Currency Area; Asian economic integration; Structural Vector Auto Regression; ASEAN+3

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2014 Bank of Japan All Rights Reserved.

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