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Prospects For Enhanced Exchange Rate Cooperation in East Asia: Some Preliminary Findings from Generalized PPP Theory

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  • Peter Wilson

    ()
    (Department of Economics, National University of Singapore)

  • Choy Keen Meng

Abstract

The Asian financial crisis increased economic disparities in the East Asian region, thus making monetary integration more difficult, but rekindled political interest in Asian monetary and exchange rate cooperation. This paper applies the theory of Generalized Purchasing Power Parity (G-PPP), which looks at the behavior of long-run real exchange rates, to assess the potential for an optimum currency area (OCA) among a subset of East Asian countries based on five of the more advanced members of the Association of Southeast Asian Nations (ASEAN5). Our findings suggest little support for an OCA for ASEAN5 as a bloc prior to the Asian financial crisis and mixed results in the post-crisis period. In particular, asymmetries in the way countries adjust to shocks and low or insignificant speeds of adjustment were found. Thus, although the application of single OCA criteria is notoriously demanding and our tests apply to only one of the many criteria for the successful formation of an OCA, we cannot find persuasive evidence that ASEAN5 as a group constitute a potential currency area with either the USA or Japan, even when the ‘noisy’ period of the Asian financial crisis is omitted.

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Bibliographic Info

Paper provided by National University of Singapore, Department of Economics, SCAPE in its series SCAPE Policy Research Working Paper Series with number 0601.

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Length: 31 pages
Date of creation: Jan 2006
Date of revision:
Handle: RePEc:sca:scaewp:0601

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Web page: http://www.fas.nus.edu.sg/ecs/scape/index.html
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Keywords: Optimum currency area; exchange rates; East Asia; ASEAN;

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Cited by:
  1. Gilles de Truchis & Benjamin Keddad, 2012. "South East Asian Monetary Integration: New Evidences from Fractional Cointegration of Real Exchange Rates," William Davidson Institute Working Papers Series wp1039, William Davidson Institute at the University of Michigan.
  2. Dimitrios Sideris, 2009. "Do the new EU member states form an Optimum Currency Area with the eurozone? Evidence from six Central and Eastern European Countries," SEEMHN papers, National Bank of Serbia 16, National Bank of Serbia.
  3. Mishra, Ritesh Kumar & Sharma, Chandan, 2010. "Real exchange rate behavior and optimum currency area in East Asia: Evidence from Generalized Purchasing Power Parity," International Review of Financial Analysis, Elsevier, Elsevier, vol. 19(3), pages 205-213, June.
  4. Chen, Xiaofen, 2012. "The dampening effect of bank foreign liabilities on monetary policy: Revisiting monetary cooperation in East Asia," Journal of International Money and Finance, Elsevier, Elsevier, vol. 31(2), pages 412-427.

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