Testing for contagion in ASEAN exchange rates
The Asian financial crisis in 1997 brought to the attention of member countries of the Association of South East Asian Countries (ASEAN-5) (comprising Indonesia, Malaysia, the Philippines, Singapore and Thailand) the need for closer monetary co-operation. Central to the OCA literature is the nature and symmetry of underlying economic disturbances. If the economic disturbances are similar across the countries in a region, then the costs of establishing a common currency area are likely to be small. As the presence of contagion necessarily means there is an increase in the correlation of shocks experienced within a region, this paper examines the suitability of establishing a common currency area for ASEAN-5 from the perspective of contagion. In order to select the breakpoints for contagion endogenously, a modified sequential dummy variable method is developed. The empirical results show that contagion is present between all country pairs in ASEAN-5, which indicates that the degree of correlation among the ASEAN-5 economies has increased during the Asian financial crisis.
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Volume (Year): 68 (2005)
Issue (Month): 5 ()
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References listed on IDEAS
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- Donald W.K. Andrews, 1990.
"Tests for Parameter Instability and Structural Change with Unknown Change Point,"
Cowles Foundation Discussion Papers
943, Cowles Foundation for Research in Economics, Yale University.
- Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-856, July.
- Mardi Dungey & Diana Zhumabekova, 2001. "Testing for contagion using correlations: some words of caution," Pacific Basin Working Paper Series 2001-09, Federal Reserve Bank of San Francisco.
- McAleer, Michael, 2005. "Automated Inference And Learning In Modeling Financial Volatility," Econometric Theory, Cambridge University Press, vol. 21(01), pages 232-261, February.
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