Prospects of Monetary Integration in the ASEAN

• Thesis title in Czech: Vyhlídky měnové integrace zemí ASEAN
• Thesis title in English: Prospects of Monetary Integration in the ASEAN
• Academic year of topic announcement: 2020/2021
• Thesis type: Bachelor's thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: doc. Mgr. Tomáš Holub, Ph.D.
• Author: hidden - assigned by the advisor
• Date of registration: 11.06.2021
• Date of assignment: 27.09.2021
• Date and time of defence: 08.06.2022 09:00
• Venue of defence: Opletalova - Opletalova 26, O105, Opletalova - místn. č. 105
• Date of electronic submission: 03.05.2022
• Date of proceeded defence: 08.06.2022
• Opponents: Mgr. Dominika Ehrenbergerová

Guidelines

Methodology

The theory of optimum currency areas suggests certain criteria that are to be met and that can be measured quantitatively, such as significant intra-regional trade or high factor mobility. To get the data necessary for the assessment of these criteria, I chiefly use the databases of the UN (or its agencies).

To test the convergence to a common currency area, I employ the regression model by Bayoumi and Eichengreen (1997), originally used for European countries. Variables in the model are based on trade, exchange rates, output, and GDP of the concerned countries.

Other aspects, such as fiscal policies of the states (and whether they would be in accordance with the Maastricht criteria) and qualitative factors like the general political situation in the region, are also considered.

References

Bacha, O. I. (2008). A common currency area for ASEAN? Issues and feasibility. Applied Economics, 40(4), 515-529.
Bayoumi, T., & Eichengreen, B. (1997). Ever closer to heaven? An optimum-currency-area index for European
countries. European economic review, 41(3-5), 761-770.
Bayoumi, T., Eichengreen, B., & Mauro, P. (2000). On regional monetary arrangements for ASEAN. Journal of
the Japanese and International Economies, 14(2), 121-148.
Bayoumi, T., & Mauro, P. (2001). The suitability of ASEAN for a regional currency arrangement. World
Economy, 24(7), 933-954.
Frankel, J. A., & Rose, A. K. (1998). The endogenity of the optimum currency area criteria. The economic
journal, 108(449), 1009-1025.
Lee, J. W., Park, Y. C., & Shin, K. (2003). A currency union in East Asia. Available at SSRN 396260.
McKinnon, R. I. (1963). Optimum currency areas. The American economic review, 53(4), 717-725.
Mundell, R. A. (1961). A theory of optimum currency areas. The American economic review, 51(4), 657-665.
Ng, T. H. (2002). Should the Southeast Asian countries form a currency union?. The Developing
Economies, 40(2), 113-134.

Preliminary scope of work in English

Research question and motivation

In this thesis, I examine the potential of countries of the Association of Southeast Asian Nations for a currency union.

As the integration process in Southeast Asia proceeds, a question arises, whether the ASEAN should be aspiring to make a move towards a single currency. For the ASEAN region, ever more interesting for the outside world, it could naturally be seen as a great opportunity to grow further and to strengthen its position on the global stage. It is therefore essential to analyze whether a currency union could be a viable option for the ASEAN (or pairings of only some of its members) and to identify the obstacles standing in the way of such a project.

The assessment of the suitability for a monetary union in this thesis is done primarily by reviewing the theoretical criteria for an optimum currency area, as they were identified and discussed by economists pivotal in this field, particularly by Mundell (1960). I utilize the regression model built upon these theoretical foundations, which was created by Bayoumi and Eichengreen (1997). In their paper, the model was used for certain European countries, here it is reapplied for the ASEAN countries.

While the suitability of the ASEAN for a single currency has already been covered by several authors, these studies, being typically older, do not take into account the most recent developments in the area. In this thesis, I use the very latest data and consider also the current economic and political situation in the region. The outcomes based on the newest data are compared with the results generated by the older data. Comparisons with the Eurozone are also made in the thesis. Besides just looking at the differences in the relevant data between the two cases I also comment on how the ASEAN countries would do if faced with the Maastricht criteria.

All in all, the thesis attempts to answer the straightforward question "Should the ASEAN form a monetary union?", but also to further analyze matters related to the question. It thus investigates in more detail the problems for the single currency in Southeast Asia, compares the situation of the monetary integration in the ASEAN with the EU, and comments generally on how realistic it seems for a monetary union to be formed in this region in the future.

Contribution

Various papers concerning the topic have been written. They have employed various methods, including the regression model I use. Bayoumi, Eichengreen, and Mauro (2000) and Bayoumi and Mauro (2001) concluded that while the ASEAN is behind the founding countries of the EMU before the Maastricht Treaty in terms of preparedness for a common currency, the difference is not as significant. Ng (2002) focused on the correlation of shocks and found the results for the ASEAN countries to be better in this regard than for the EU countries. A particularly high correlation was observed between Indonesia, Malaysia, and Singapore, suggesting a good potential of these three countries for monetary integration. Lee, Park, and Sheen (2003) studied the currency union prospects for the wider area of East Asia using the dynamic factor model and their conclusions were more ambiguous. Another study - Bacha (2008), utilized the VAR analysis and came with a rather negative verdict on the prospects of a currency union, pointing at numerous serious obstacles. Several other studies on the topic have been made as well.

As conclusions of the research in this area seem to vary to a certain extent, this topic appears to be open to further research. Since I use the latest data and consider the situation of the region as it is now, it is well possible for my conclusions to differ considerably from the older studies. It may also be interesting to observe the results based on the new data as the last year was heavily impacted by the coronavirus pandemic. A comparison with older results can also be useful by possibly revealing certain trends in economic integration in the region.

The thesis also makes the comparison with the Eurozone, which has become perhaps even more interesting as a model case for the study of currency unions after the Great Recession and the outbreak of the European debt crisis. Possible scenarios of only certain members of the ASEAN forming a currency union, as is the case in the EU, are also discussed.

Thus, I provide an overall summary of all the major issues linked with a hypothetical common currency area in the ASEAN and an up-to-date evaluation of the prospects of this project.

Outline

Abstract
Introduction
a Overview of the topic, generally about the economic integration in the ASEAN
b Existing theory and research on the topic
c My contribution
d Conclusions
e Structure of the thesis
Literature review
a Literature about optimum currency areas
b Literature about a possible currency area in the ASEAN
Methodology
The description of methods employed to test the suitability for a currency area
Results
a General verdict on the idea of a currency union in the ASEAN
b Outline of the key obstacles
c Comparison with Europe
Conclusion
a Commentary on the results
b Comparison with past research and options for further research