The World Economy (2006) doi: 10.1111/j.1467-9701.2006.00867.x © 2006 The Authors Journal compilation © 2006 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA 1759 Blackwell Publishing Ltd Oxford, UK TWEC World Economy 0378-5920 © 2006 Blackwell Publishers Ltd (a Blackwell Publishing Company) December 2006 29 12 Original Article MONETARY INTEGRATION IN EAST ASIA CRAIG R. PARSONS and KIYOTAKA SATO Exchange Rate Pass-through and Currency Invoicing: Implications for Monetary Integration in East Asia Craig R. Parsons and Kiyotaka Sato Yokohama National University Exporter’s price setting behaviour and currency invoicing play a key role in the literature on the new open-economy macroeconomics. This paper estimates exchange rate pass-through coefficients for the exports of four ASEAN countries: Indonesia, Malaysia, the Philippines and Thailand. In addition, previous estimates of pass-through as well as invoicing behaviour in East Asia are discussed in the context of regional integration. The new pass-through coefficients are estimated under two alternate specifications for up to 34 goods for each of the four ASEAN countries destined for up to 13 major markets. The results suggest: (a) little pass-through is occurring in Southeast Asia and; (b) this lack of pass-through is more likely attributable to the fact that they are small countries in a relatively integrated market, rather than evidence of pricing to market. The implications for regional monetary integration of this apparently low degree of pass-through are detailed. 1. INTRODUCTION A S regional integration has deepened through increased trade, investment and financial flows, there is now a lively debate as to whether East Asian econ- omies can (successfully) form a monetary union. Analysis of East Asian monetary union generally follows one of two approaches. The first is to apply the theory of optimum currency areas (OCA) to the East Asian region and to examine whether the region meets the pre-conditions for forming an OCA. Among the pre-conditions for an OCA, business cycle syn- chronisation and symmetry in the pattern of shocks are typically analysed in the literature, as seen in Bayoumi and Eichengreen (1994), Bayoumi et al. (2000), Shin and Wang (2004) and Zhang et al. (2004). The second approach is to apply the framework of the ‘new open-economy macroeconomics’ to the issues of East Asian monetary integration, optimal basket pegs, and other related issues. Otani (2002), for example, develops a theoretical model which examines the transmission effects of domestic and foreign monetary policies and conducts simulations for the international transmission effects between Japan and the United States. The new open-economy macroeconomics models make specific assumptions about firms’ export pricing behaviour, which greatly affects both the results of his theoretical analysis and model simulations. Earlier work on this subject was presented at the Joint YNU/KIEP International Conference in Yokohama, 1–2 September, 2005, and the 80th Annual Conference of Western Economic Associ- ation International in San Francisco, 4 –8 July, 2005. The authors would like to thank Paul De Grauwe, Masanaga Kumakura, Akira Kohsaka, Etsuro Shioji, Kenshi Taketa, Nazrul Islam, Eric Ramstetter, Chan-Hyun Sohn, Sadayuki Takii and Fukunari Kimura for helpful comments on earlier drafts. The study is financially supported by the Japan Society for the Promotion of Science through the Grant-in-Aid for Scientific Research (B), 116330059.