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The 41st WORKSHOP
 1 March 2008 (Sat), GRIPS Campus in Tokyo, 14:00-17:00

Subject:
"East Asian Currency Area:
A Bayesian Dynamic Factor Model Analysis"


by
Mr. Nguyen Ngoc Toan

PhD candidate, Graduate School of Economics, Kyoto University

Summary

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In the 41st workshop, VDF-Tokyo invited Mr. Nguyen Ngoc Toan, a PhD candidate of the Graduate School of Economics, Kyoto University, to share his findings for feasibility of a common currency area in East Asia.

 

The main motivations for his study resulted from the observations of successful issuance of the Euro, the Asian financial crisis in the late 1990fs, as well as increasing regional economic integration. Also, Mr. Toan wanted to introduce his methodology in analyzing such an interesting research field. In particular, he focused on checking the symmetry of business cycles of different countries in the region in order to see whether forming a common currency would be feasible and desirable.   

 

At the beginning, Mr. Toan made an overview of the benefits and costs of a common currency with an emphasis on monetary policy and symmetric business cycles of all countries using such a currency. Going further, Mr. Toan also reviewed previous studies using structural vector autoregression (VAR) approach and principle component approach to analyze the issue for East Asia. He pointed out some disadvantages of these approaches, in which no separation of regional and world shocks were the main weakness. To overcome, Mr. Toan proposed a model that could separate regional, global, and country-specific factors influencing aggregate output for each of studied countries. Also, his model was not based on bilateral, but on regional common factors, in which no representative country for the region was needed. Mr. Toan then presented his modeling methods to measure shock symmetry, and noted some possible identification issues of such methods. His estimates also included those for countries in Europe, Northern America, and Southern America. Among numerous findings, Mr. Toan showed that forming a common currency for East Asia as a whole would be less feasible than Europe, but some countries in the region, such as Japan, Korea, and Singapore, might be suitable for such a currency area because they had higher degree of synchronization than other groups of regional countries.

 

[For detailed analysis, please refer to his paper and presentation at the end of this summary].

 

Mr. Vu Tuan Khai (YNU & VDF-Tokyo) started the discussion session. He thought that Germany could be representative for the Euro area, but Japan might not the representative country for East Asia since it had a very different level of economic development in comparison with other countries. In addition, Mr. Khai also made a critical comment on the modeling for estimation of impacts by regional and world factors on aggregate output, as he argued that a macroeconomic shock, such as changes in oil price, would have substantially different impacts on different countries, and thus such an estimation needed to be considered by a number of country-specific factors. In his response, Mr. Toan said that the estimates were done for each country so as to get their respective coefficients. Though, Mr. Toan agreed that more country-specific factors added in the model for each country would produce more appropriate estimates.

 

Regarding data used for estimation, Prof. Kenichi Ohno (GRIPS & VDF) said that there were many economic changes in each studied country in such a long period (1960-2002), and he thought that using quarterly data from 1990 to date would be more appropriate. Also, he suggested that Mr. Toan consider some important shocks during the studied period to see how they related to business cycles of the studied countries, instead of using the whole period as in his current estimates. Agreeing with this comment, Mr. Mizanur Rahman (GRIPS) added that there would be a variety of structural breaks in each country in the study period, and thus it would be more persuasive if these events were considered in analyzing business cycle synchronization for the regional countries. Mr. Toan acknowledged for these comments, and he said that he would introduce variables representing such important events in the revised paper.

 

Going in detail with the estimates, Mr. Khai commented that it would be better to consider shocks from demand side or supply side, as they were simply different in terms of impacts and policy responses. Mr. Toan did agree with this comment, and he would also consider this issue in the next step.    

    

At the end, Mr. Toan thanked all participants for their comments on the paper. He also exchanged some information about other papers that he was working, in which some of the comments had been considered in these papers.

 

As usual, we had about one hour for informal meeting. All participants introduced themselves with research interests. Some current economic and social issues in Vietnam, including inflation and its causes, were lively discussed.

 

         
Paper
(PDF172KB) | Slides (PDF88KB)                  

 (By Giang Thanh Long)

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