Can a Common Currency Induce Intra‐regional Trade? The Southeast Asian Perspective

Abstract

Recent literature strongly suggests that a common currency could be a potential long-term currency arrangement for Association of Southeast Asian Nations (ASEAN). However, a high level of macroeconomic heterogeneity among these countries raises questions about the viability of managing a common monetary policy in the long run. In response to such currency management policy debate, this study analyzes the intra-regional trade induction capability of a common currency for the ASEAN region. Using a gravity model of trade and an extended event study approach, the study finds that a common currency would induce intra-ASEAN trade by 11-14 cents against every dollar of ASEAN gross domestic product. However, if the cost of managing regional macroeconomic harmonization is substantially high, a currency union for the ASEAN economy not be cost effective.

The impact of China’s one belt one road initiative on international trade in the ASEAN region

“…We therefore believe that a new study that examines developments since the implementation of the ASEAN-China Free Trade Area (or ASEAN-China FTA) in 2000 and the OBOR initiative in 2013 is needed. 6 Simple examples of the application of a conventional gravity-type model to the intraregional bias of selected regional groupings (one being ASEAN) include Hamilton et al (1992), Sharma and Chua (2000), and Kabir and Salim (2016). Applying the gravity model to examine the potential impact of European Union (EU) tourist inflows under OBOR initiatives, a more recent study by Jannaschk-Schmitz (2019) suggests that infrastructures such as roads, railways and air services connected to this initiative have had a significant influence on EU tourist flows.…”