Edited by Koichi Hamada, Beate Reszat and Ulrich Volz
Chapter 8: Three Cases for Monetary Integration in East Asia
Ulrich Volz1 INTRODUCTION 8.1 Since the Asian financial crisis, monetary and financial integration has become a much-discussed topic in East Asia.2 The past years have seen a proliferation of proposals for fostering East Asian integration, ranging from currency baskets and regional exchange rate systems to monetary union. But unlike in Europe, which saw long-standing discussions on the costs and benefits of monetary unification, a proper debate is not yet underway in East Asia. Instead, the “classical” European arguments for and against monetary integration are implicitly being adopted, despite the very different histories of economic development of East Asian countries as compared to those of European countries. The implications of monetary integration for East Asia have barely been explored. The discussion centers very much on whether East Asia qualifies as an optimum currency area (OCA), even though OCA theory has been rightfully criticized for its static point of view (Frankel and Rose 1998, Schelkle 2001a, 2001b). It is basically concerned with an ex ante analysis of the costs and benefits of monetary integration and does not take into account changes in economic activity that are induced through a policy of integration. Moreover, OCA theory is limited to an analysis of the allocative effects of monetary integration but fails to address potential accumulative effects. The development context of monetary integration has largely been ignored. But monetary integration must not be analyzed solely in terms of whether it is advantageous given the present conditions. It is also important to ask whether and in...
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