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Three Essays on Regional Economic Integration and Exchange Rate Regimes University of Kentucky UKnowledge University of Kentucky Doctoral Dissertations Graduate School 2008 THREE ESSAYS ON REGIONAL ECONOMIC INTEGRATION AND EXCHANGE RATE REGIMES Xiaodan Zhao University of Kentucky, [email protected] Right click to open a feedback form in a new tab to let us know how this document benefits ou.y Recommended Citation Zhao, Xiaodan, "THREE ESSAYS ON REGIONAL ECONOMIC INTEGRATION AND EXCHANGE RATE REGIMES" (2008). University of Kentucky Doctoral Dissertations. 646. https://uknowledge.uky.edu/gradschool_diss/646 This Dissertation is brought to you for free and open access by the Graduate School at UKnowledge. It has been accepted for inclusion in University of Kentucky Doctoral Dissertations by an authorized administrator of UKnowledge. For more information, please contact [email protected]. ABSTRACT OF DISSERTATION Xiaodan Zhao The Graduate School University of Kentucky 2008 THREE ESSAYS ON REGIONAL ECONOMIC INTEGRATION AND EXCHANGE RATE REGIMES ________________________________________ ABSTRACT OF DISSERTATION ________________________________________ A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the College of Business and Economics at the University of Kentucky By Xiaodan Zhao Lexington, Kentucky Directors: Dr. Yoonbai Kim, Professor of Economics Lexington, Kentucky 2008 Copyright © Xiaodan Zhao 2008 ABSTRACT OF DISSERTATION THREE ESSAYS ON REGIONAL ECONOMIC INTEGRATION AND EXCHANGE RATE REGIMES This dissertation consists of three independent essays addressing several key issues related to the empirical application of optimum currency area. The first essay explores the features of the CFA franc zone by operationalizing Robert Mundell’s (1952) criteria for an optimum currency area. A vector autoregression method is used in modeling national outputs as determined by global, regional and country-specific shocks. It finds that domestic outputs of the CFA franc zone countries are strongly influenced by country-specific shocks. These results suggest that the CFA franc zone countries are structurally different from each other and the monetary union may have been a costly arrangement for the member countries. The second essay focuses on the Eastern Caribbean Currency Union (ECCU). A 2-vairable vector autoregressive model is estimated to investigate the extent of symmetric shocks in the small open economies of the ECCU. The paper finds that domestic outputs of the ECCU countries are strongly influenced by regional shocks. These results indicate that the ECCU countries are structurally similar to each other and exchange arrangements appear to have well served the region and the group of countries is more likely to be an optimum currency area. The third essay explores the possibility of a currency union in East Asia. In this essay, the extent of global and regional integration in East Asia is investigated using the stock price index as a measure of economic performance. A similar VAR model is employed to separate the underlying shocks into global, regional and country-specific shocks. The estimation results show that country-specific shocks play a dominant role in East Asia although their role appears to have declined over time, especially after the 1997 financial crisis. Global and regional shocks are responsible for small but increasing shares of stock price fluctuations in most countries. The results indicate that, despite years of liberalization and regional integration, economies in East Asia remain dissimilar and are subject to asymmetric shocks and it might be costly for East Asian countries to abandon monetary policy independence to form a monetary union and that a more flexible exchange rate regime might be desirable. KEYWORDS: Optimum Currency Area; Country-specific shocks vs. regional shocks; the CFA franc zone; the Eastern Caribbean Currency union; Financial integration in East Asia Xiaodan Zhao July 7 th , 2008 THREE ESSAYS ON REGIONAL ECONOMIC INTEGRATION AND EXCHANGE RATE REGIMES By Xiaodan Zhao Yoonbai Kim Director of Dissertation William Hoyt Director of Graduate Studies July 7 th , 2008 RULES FOR THE USE OF DISSERTATIONS Unpublished dissertation submitted for the Doctor’s degree and deposited in the University of Kentucky Library are as a rule open for inspection, but are to be used only with due regard to the rights of the authors. Bibliographical references may be noted, but quotations or summaries of parts may be published only with the permission of the author, and with the usual scholarly acknowledgments. Extensive copying or publication of the dissertation in whole or in part also requires the consent of the Dean of the Graduate School of the University of Kentucky. A library that borrows this dissertation for use by its patrons is expected to secure the signature of each user. Name Date ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ DISSERTATION Xiaodan Zhao The Graduate School University of Kentucky 2008 THREE ESSAYS ON REGIONAL ECONOMIC INTEGRATION AND EXCHANGE RATE REGIMES ________________________________________ DISSERTATION ________________________________________ A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the College of Business and Economics at the University of Kentucky By Xiaodan Zhao Lexington, Kentucky Directors: Dr. Yoonbai Kim, Professor of Economics Lexington, Kentucky 2008 Copyright © Xiaodan Zhao 2008 To my parents ACKNOWLEDGEMENTS The following dissertation, while an individual work, benefited from the insights and the direction of several people. First, my dissertation chair, Dr. Yoonbai Kim, exemplifies the high quality scholarship to which I aspire. He provided timely and instructive comments and evaluation at every stage of the dissertation process, allowing me to complete this project on Schedule. Next, I wish to thank the members of my dissertation committee and outside reader, Dr. James Fackler, Dr. Mark Toma, Dr. Michael Reed and Dr. Dennis Officer, for providing me insights that guided and challenged my thinking and substantially improving the finished product. I would also like to thank Dr. Yung-hsiang Ying of National Sun Yat-sen University of Taiwan for his help with data in this dissertation. In addition to the technical and instrumental assistance above, I received equally important assistance from family and friends. My parents instilled in me, from an early age, the desire and skills to obtain the Ph.D. degree. Without them, this dissertation would be impossible. Many friends of mine provided ongoing support throughout the dissertation process. Finally, I wish to thank the respondents of my study. Their comments and insights created an informative and interesting project with opportunities for future work. iii TABLE OF CONTENTS Acknowledgements ....................................................................................................... iii List of Tables.................................................................................................................. vi List of Figures ...............................................................................................................vii List of Files ................................................................................................................. viii Chapter One .................................................................................................................... 1 Introduction ..................................................................................................................... 1 Chapter Two .................................................................................................................... 4 Is the CFA Franc Zone an Optimum Currency Area? 2.1 Introduction ............................................................................................................ 4 2.2 The CFA Franc Zone Arrangements: Institutional Aspects and Performance .......... 6 2.3 Model ..................................................................................................................... 8 2.4 Empirical results................................................................................................... 10 2.5 Robustness ........................................................................................................... 13 2.6 Conclusion ........................................................................................................... 14 Chapter Three ................................................................................................................ 23 A test of Optimal Currency Area for The ECCU 3.1 Introduction .........................................................................................................
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