Intra-industry trade and business cycles in ASEAN

Abstract

Recently, a new resolve for both increased economic integration and monetary and exchange rate cooperation has started to emerge in ASEAN, especially since the 1997-1998 Asian financial crisis. According to the optimum currency area theory, the degree of trade integration is one most important criterion for joining a currency union. The large increase in intra-ASEAN trade in recent years naturally raises the question of whether the ASEAN countries are becoming better prepared to form a currency union. This paper sets to test whether the recorded increase in intra-ASEAN trade is leading the ASEAN members to closer economic integration and thus to better satisfy the criteria for a common currency. Two separate models are estimated for that purpose. First, a variation of the model of Frankel and Rose (1997) was estimated for the ASEAN members. As the results were not very significant, a new methodology that uses the whole sample period data instead of dividing the data into sub-periods was conducted. The results with our own model were very significant and robust when four of the ASEAN5 countries were considered, and showed a clear positive correlation between intra-industry trade and business cycle synchronization in ASEAN. This result has important implications for the prospects of the creation of a common currency in the region.

Regionalization vs. Globalization

“…Some empirical studies report that increased volume of intra-regional trade flows, especially in the form of intraindustry trade, has been an important factor in explaining the degree of business cycle synchronization in certain regions (for North America, seeSwiston and Bayoumi, 2008; for Asia, seeWang, 2003 andShin and Sohn, 2006;Rana, 2008;and Cortinhas, 2007; for Europe, see Bower and Guillemineau, 2006;and Shin and Wang, 2005) He and Liao (2010). emphasize the importance of the region specific supply factors in explaining the degree of synchronization of Asian business cycles.…”

Regionalization vs. Globalization

“…Some empirical studies report that increased volume of intra-regional trade flows, especially in the form of intraindustry trade, has been an important factor in explaining the degree of business cycle synchronization in certain regions (for North America, seeSwiston and Bayoumi, 2008; for Asia, see Wang, 2003 andShin and Sohn, 2006;Rana, 2008;and Cortinhas, 2007; for Europe, see Bower and Guillemineau, 2006;and Shin and Wang, 2005) He and Liao (2010). emphasize the importance of the region specific supply factors in explaining the degree of synchronization of Asian business cycles.…”

The Mystery of Missing Real Spillovers in Southern Africa: Some Facts and Possible Explanations

“…East Asia and Latin America are two other regions in which real spillovers from large emerging economies to their smaller neighbours have attracted the interest of researchers. Choe (), Shin and Wang (), and Cortinhas () find strong empirical support for the hypothesis that intra‐industry trade in parts and components within vertically integrated production chains tends to propagate industry‐specific shocks across the region and create a positive relation between trade integration and output synchronisation. There is mixed evidence as to whether spillovers from China‐specific shocks to the region have increased – see Haltmaier et al .…”