IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

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

  • Peter Wilson


    (Department of Economics, National University of Singapore)

  • Choy Keen Meng

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

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

in new window

Length: 31 pages
Date of creation: Jan 2006
Date of revision:
Handle: RePEc:sca:scaewp:0601
Contact details of provider: Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. MacDonald, Ronald, 1998. "What determines real exchange rates?: The long and the short of it," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 8(2), pages 117-153, June.
  2. Venus Khim-sen Liew & Ahmad Zubaidi Baharumshah & Terence Tai-leung Chong, 2003. "Are Asian Real Exchange Rates Stationary?," International Finance 0307002, EconWPA, revised 01 Nov 2004.
  3. Sarno, Lucio, 2000. "Real exchange rate behavior in the Middle East: a re-examination," Economics Letters, Elsevier, vol. 66(2), pages 127-136, February.
  4. Tamim Bayoumi, 1994. "A Formal Model of Optimum Currency Areas," IMF Working Papers 94/42, International Monetary Fund.
  5. John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17.
  6. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
  7. Park, Donghyun, 2002. "Recent Trends in Western European Income Convergence," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 17, pages 80-84.
  8. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  9. Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic Journal, Royal Economic Society, vol. 108(449), pages 1009-25, July.
  10. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
  11. Mundell, Robert, 2003. "Prospects for an Asian currency area," Journal of Asian Economics, Elsevier, vol. 14(1), pages 1-10, February.
  12. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November.
  13. Nasution, Anwar, 2005. "Monetary cooperation in East Asia," Journal of Asian Economics, Elsevier, vol. 16(3), pages 422-442, June.
  14. Richard Pomfret, 2005. "Sequencing Trade and Monetary Integration," Others 0502004, EconWPA.
  15. Cheung, Yin-Wong & Lai, Kon S, 1995. "Lag Order and Critical Values of a Modified Dickey-Fuller Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(3), pages 411-19, August.
  16. Donald W.K. Andrews, 1988. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Cowles Foundation Discussion Papers 877R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1989.
  17. Lee Kian Lim & Michael McAleer, 2003. "Convergence and Catching Up in ASEAN: A Comparative Analysis," CIRJE F-Series CIRJE-F-218, CIRJE, Faculty of Economics, University of Tokyo.
  18. corrinne ho & robert n mccauley, 2004. "Living with flexible exchange rates:," International Finance 0411003, EconWPA.
  19. Tamim Bayoumi & Paolo Mauro, 2001. "The Suitability of ASEAN for a Regional Currency Arrangement," The World Economy, Wiley Blackwell, vol. 24(7), pages 933-954, 07.
  20. Ronald MacDonald & Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals: A Methodological Comparison of BEERs and FEERs," IMF Working Papers 98/67, International Monetary Fund.
  21. Richard Pomfret, 2004. "Sequencing Trade and Monetary Integration: Issues and Applications to Asia," School of Economics Working Papers 2004-14, University of Adelaide, School of Economics.
  22. Taylor, Mark P. & Peel, David A., 2000. "Nonlinear adjustment, long-run equilibrium and exchange rate fundamentals," Journal of International Money and Finance, Elsevier, vol. 19(1), pages 33-53, February.
  23. Mkenda, Beatrice Kalinda, 2001. "Is East Africa an Optimum Currency Area?," Working Papers in Economics 41, University of Gothenburg, Department of Economics.
  24. Junichi Goto & Koichi Hamada, 1994. "Economic Preconditions for Asian Regional Integration," NBER Chapters, in: Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, NBER-EASE Volume 3, pages 359-388 National Bureau of Economic Research, Inc.
  25. Melitz, Jacques, 1991. "A Suggested Reformulation of the Theory of Optimal Currency Areas," CEPR Discussion Papers 590, C.E.P.R. Discussion Papers.
  26. Eichengreen, Barry & Bayoumi, Tamim, 1996. "Is Asia an Optimum Currency Area? Can It Become One? Regional, Global and Historical Perspectives on Asian Monetary Relations," Center for International and Development Economics Research, Working Paper Series qt1td5x343, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  27. Tse, Y. K. & Ng, L. K., 1997. "The cointegration of Asian currencies revisited," Japan and the World Economy, Elsevier, vol. 9(1), pages 109-114, March.
  28. Kohsaka, Akira, 2004. "A fundamental scope for regional financial cooperation in East Asia," Journal of Asian Economics, Elsevier, vol. 15(5), pages 911-937, October.
  29. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  30. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July.
  31. Bayoumi, T. & Eichengreen, B., 1994. "One Money or Many? Analysing the Prospects for Monetary Unification in Various Parts of the World," Princeton Studies in International Economics 76, International Economics Section, Departement of Economics Princeton University,.
  32. Enders, Walter & Hurn, Stan, 1994. "Theory and Tests of Generalized Purchasing-Power Parity: Common Trends and Real Exchange Rates in the Pacific Rim," Review of International Economics, Wiley Blackwell, vol. 2(2), pages 179-90, June.
  33. Artis, M.J. & Zhang, W., 2002. "Membership of EMU: A Fuzzy Clustering Analysis of Alternative Criteria," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 17, pages 54-79.
  34. Stevenson, Adlai E., 2004. "Regional financial cooperation in Asia," Journal of Asian Economics, Elsevier, vol. 15(5), pages 837-841, October.
  35. George Tavlas, 1994. "The theory of monetary integration," Open Economies Review, Springer, vol. 5(2), pages 211-230, March.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:sca:scaewp:0601. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.