An economic analysis of the feasibility of a potential ASEAN single currency: Exchange rate integration - A VAR Approach

Objectives The primary objectives of this study were the dynamic exchange rate cointegration relationships existing among ASEAN member states to explore the extent of economic cohesion following the crises, indicate potential OCA-subgroupings, and produce some policy recommendations on how regional economic integration of Southeast Asian countries might be improved to adopt a single currency in the future. Summary The debate on a single currency for ASEAN state members has emerged as a primary regional concern, particularly in the wake of both the 1997 Asian Financial Crisis and the 1999 Euro currency launch. More recently, the Global Financial Crisis along with the founding of the ASEAN Economic Community have revitalized the discussion. Many research papers have considered this topic; however, concerning that the ASEAN has facilitated encouraging progress in the development of broader regional economic integration during the last three decades, it seems somewhat important to scrutinize the scope of a common currency in Southeast Asia in the period 1997M1-2017M7. This study thus will examine the degree of integration of exchange rates between ASEAN countries by applying a cointegration approach. Conclusions The empirical results from 1997M1 to 2017M7 indicated that the crises have somewhat triggered Southeast Asian countries to integrate their economy further, particularly the exchange rates. Though the results were unlikely to have great significance for a single currency in Southeast Asia, they suggested that if a single currency is adopted, the region can start with two sub-groups including Brunei, Singapore, Vietnam, and Thailand or Brunei, Singapore, Indonesia, Laos, Vietnam and the Philippines. At present, the governments should highly focus on building a fully-fledged ASEAN common market, and later, an economic union rather than embarking prematurely on an ASEAN monetary union. Simultaneously, political and institutional commitment to a common currency in all member countries should also be strengthened to form a solid basis for a single currency of the region in the future