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

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  • Qin, Duo
  • Tan, Tao
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Abstract

A multilateral currency union removes intraregional exchange rates but not the union rate. The pre-union intraregional exchange rate variability is thus latent; a two-step procedure is developed to measure this. The measured variables are used to model inflation and intraregional trade growth of individual union members. Counterfactual simulations of the union impact are carried out using the resulting models. Application to ASEAN+3 shows that the intraregional variability mainly consists of short-run exchange rate shocks, that the variability significantly affects inflation and intraregional trade of major ASEAN+3 members, and that a union would reduce inflation and promote trade regionwide.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 33 (2009)
Issue (Month): 10 (October)
Pages: 1793-1803

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Handle: RePEc:eee:jbfina:v:33:y:2009:i:10:p:1793-1803

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Web page: http://www.elsevier.com/locate/jbf

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Keywords: Currency union Latent variables Dynamic factor model Simulation;

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Cited by:
  1. Moerman, Gerard A. & van Dijk, Mathijs A., 2010. "Inflation risk and international asset returns," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 840-855, April.

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