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How Much Intraregional Exchange Rate Variability Could a Currency Union Remove? The Case of ASEAN+3

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Listed author(s):
  • Duo Qin

    (Queen Mary, University of London)

  • Tao Tan

    (Tianjin University of Finance and Economics)

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.

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Paper provided by Queen Mary University of London, School of Economics and Finance in its series Working Papers with number 631.

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Date of creation: Jul 2008
Handle: RePEc:qmw:qmwecw:wp631
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Keywords: Currency union; Latent variables; Dynamic factor model; Simulation;

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Find related papers by JEL classification:
  • F02 - International Economics - - General - - - International Economic Order and Integration
  • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
  • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
  • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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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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