How much intraregional exchange rate variability could a currency union remove? The case of ASEAN+3

Abstract

A multilateral currency union removes the intraregional exchange rates but not the union rate variability with the rest of the world. The intraregional exchange rate variability is thus latent. A two-step procedure is developed to measure the variability. The measured variables are used to model inflation and intraregional trade growth of individual union members. The resulting models form the base for counterfactual simulations of the union impact. Application to ASEAN+3 shows that the intraregional variability consists of mainly short-run shocks, which have significantly affected the inflation and trade growth of major ASEAN+3 members, and that a union would reduce inflation and promote intraregional trade on the whole but the benefits facing each member vary and may not be significant enough to warrant a vote for the union.

Regional Currency or Regional Trade Policy? An East Asian Perspective of 21st Century Growth

“…During post-crisis, Singapore and Taiwan reduce their exchange rate volatility using a diversified currency basket, while capital control and hard dollar peg enables Malaysia to maintain zero volatility at least until 2014. Source: Authors' calculation based on World Bank national accounts data and OECD National Accounts data collected from World Bank Development Indicator (WDI) Database Qin and Tan (2009), however, question about East Asia's success in using the US dollar as an anchor currency. They identified the short-run exchange rate shocks as the main constituent of intra-regional variability, which substantially affect inflation and intra-regional trade of ASEAN+3 countries.…”

Inflation risk and international asset returns

“…Rogers (2001) and Lutz (2002) analyze price data for various European cities and find substantial deviations from the law of one price. Qin and Tan (2009) suggest that currency unions could reduce the level of inflation, but Angeloni and Ehrmann (2007) show that inflation differences among euro area countries are still prominent five years after the introduction of the euro. Koedijk et al (2004) present evidence against the hypothesis of PPP for individual country pairs within the euro area.…”