Are Countries of Association of South East Asia Nations (ASEAN) Candidates of Optimum Currency Area for Monetary Union? A Structural VAR Approach

Intra-trade among ASEAN countries have remained around 20% over the period 1993 until 2001 (ASEAN Secretariat). With this significant amount of trade being conducted between members of ASEAN countries, businesses were faced with exchange rate exposure due to the volatility of the exchange rate within the regions as was experienced during the Asian Financial Crisis of 1997-98. Members of the European Union overcome this exchange rate exposure by agreeing to form a monetary union and adopting Euro as their common currency in 1999. This paper examines the feasibility of a Optimum Currency Area (OCA) for ASEAN 9 to adopt a common currency, especially after the 1997-98 Asian Financial Crisis. Using macro-economic data for 9 ASEAN countries over the 15 years period (1990–2004), the paper addresses whether an OCA would be well suited for these countries, following the trails of Euro formation