Should the Southeast Asian Countries Form a Currency Union?

Abstract

This paper examines some of the factors related to the formation of a currency union in Southeast Asia. The main part of the paper presents the results of our examination of the correlation of shocks for the Southeast Asian countries using a structural vector autoregression. The shocks are identified using restrictions on the long-run coefficient matrix as suggested by Blanchard and Quah (1989). The correlations of shocks for the EU and NAFTA countries are used for comparison. The Southeast Asian countries are shown to have more strongly correlated shocks than the EU countries. Compared with the NAFTA countries, external shocks are more closely correlated for the ASEAN countries, but the supply and demand shocks are less correlated. Indonesia, Singapore, and Malaysia, in particular, exhibit a high degree of correlation of shocks. Other criteria for monetary union, such as intra-regional trade, openness of the economy, and similarity of monetary policy are also examined.

Southeast Asian monetary integration: New evidences from fractional cointegration of real exchange rates

“…Moneta and Rüffer (2009) find 9 From a theoretical perspective, demand-shocks have only a transitory impact on the long-term product while aggregate supply-shocks influence the output in a permanent way. 10 See, also, Kim (2007), Ng (2002), Zhang et al (2004), Huang and Guo (2006) and Kwack (2004). 6 a significant common growth dynamic inside the region by using a state-space framework where common movement is captured by unobservable variables influencing the evolution of the GDP growths.…”

Asian currency union? An investigation into China's membership with other Asian countries

“…In particular, the 1997 Asian financial crisis led countries to reconsider their banking systems and exchange rate regimes in order to manage exchange rate fluctuations and to preserve a relatively stable macroeconomic environment and financial market in the region. Against this background, an Asian currency union has been proposed by a number of policymakers and researchers (Wyplosz 2001;Lee, Park, and Shin 2002;Ng 2002;Ing 2003;Kuroda 2004;Lee and Barro 2006;Sanchez 2006). A currency union is believed to bring some benefits to the whole region as well as the individual country including reduced transaction costs, reduced economic uncertainty, enhanced policy discipline and credibility and improved functioning of the monetary mechanism (Fenton and Murray 1993).…”

The Nature of Aggregate Demand and Supply Shocks in ASEAN Countries

“…Examples include Bayoumi and Eichengreen (1994) and Ng (2002). These papers basically utilized basic BQ decomposition in order to identify the shocks and found that each type of shocks in different countries in Southeast and East Asia are highly correlated, in general.…”