BOK Working/Discussion Papers

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A Political Economic Critique on the Theory of Optimum Currency Areas..

Economic Research Institute (+82-2-759-5407) 2008.03.10 2732

In recent years dynamic debate has emerged on the desirability and feasibility of creating

 a currency union in East Asia. While the debate has relied heavily on the theory of optimum

currency areas, this theory has weaknesses in explaining the actual formation of currency

unions. At this point, political economic analysis appears to demonstrate stronger explanatory

power. This paper provides a systematic review of the main developments in the literature on

optimum currency area theory and of those in the political economy literature on currency

union. Additionally, this paper addresses the feasibility of an East Asian currency union, by

applying the findings in the two academic strands to the region. It finds that even though East

Asia may be to some extent a feasible candidate for a currency union from an economic

perspective, the region’s political situation does not appear favorable for creation of one.