Monetary Union - Lessons from Okinawa

2000 Fiscal Year Final Research Report Summary

• Project/Area Number: 10630088
• Research Category: Grant-in-Aid for Scientific Research (C)
• Allocation Type: Single-year Grants
• Section: 一般
• Research Field: Public finance/Monetary economics
• Research Institution: Osaka University
• Principal Investigator: TAKAGI Shinji Osaka University, Graduate School of Economics, Professor, 大学院・経済学研究科, 教授 (20226749)
• Project Period (FY): 1998 – 2000
• Keywords: Monetary Union / Okinawa Unification

Research Abstract

The purpose of this research has been to gather and organize source materials and data related to Okinawa's monetary history and to use the data so gathered to conduct econometric analyses of the economic effects of monetary union. There is little doubt that, following the launch of Economic and Monetary Union (EMU) in Europe in 1999, monetary union is one of the most important contemporary topics in international economics. However, it will take several more years to have sufficient data to analyze the economic effects of EMU.Fortunately, the unique experience of Okinawa provides an opportunity to conduct such analyses. Okinawa, a territory of Japan under United States (US) occupation with its own currency (B-yen), was incorporated into the US monetary area in 1958, and again into the Japanese monetary area in 1972, when it was returned to Japanese sovereignty. A series of econometric tests (including cointegration tests, regression, and structural vector autoregression) suggest that, with monetary union,
(1) the variance of relative prices falls ; (2) the linkage of tradable goods prices increases ; (3) the business cycles tend to become more similar ; and (4) the magnitude of asymmetric shocks (of both real and nominal types) becomes smaller. In this sense, monetary union does seem to facilitate not only nominal but also real convergence. The paper incorporating these results is being considered for publication by an international journal.