Looking at a single currency for ASEAN-5 : an empirical study of economic convergence and symmetry

Abstract

The research investigates the feasibility of adopting a single currency for ASEAN-5 nations. Previous research (Kendall 2000, Ng 2000 and Lim and McAleer 2003) pointed out that if the national economies are not converging, or if the responses of national economies to the random shocks are asymmetric, the cost of premature monetary integration would be high. According to the two economic preconditions for a currency union, the research tests economic convergence among ASEAN-5, Japan and the U.S.A by implementing the Kalman Filter procedure, moreover, the symmetry of underlying structural shocks are also examined by applying a structural vector autoregression (SVAR) model.

The research found out Singapore, Malaysia and Thailand (ASEAN-3) appear to be relatively suitable to form an Optimum Currency Area (OCA) as a start. However, this research did not find strong evidence for whether the Japanese Yen or US dollar will be a suitable currency for the ASEAN-3 countries to adopt commonly. Therefore, this study also discussed the possibility of pegging the currencies of the ASEAN-3 countries to a basket of currencies, comprising the US dollar, Japanese Yen and Euro. This research didn't restrict ASEAN-3 countries to any types of common currency or currencies. However it is important to note that regional exchange rate stability and competitiveness are always the major concern for the ASEAN-3 countries. The ASEAN region has been making progress towards regional integration, but there are still stumbling blocks on the way. These appear in the forms such as the divergence of stages of economic development and exchange rate systems. This research suggests there is a long way before countries in the ASEAN region will be able to form a currency union and fully benefit from it.