How much intraregional exchange rate variability could a currency union remove? The case of ASEAN+3

Duo Qin and Tao Tan

Journal of Banking & Finance, 2009, vol. 33, issue 10, pages 1793-1803

Abstract: A multilateral currency union removes intraregional exchange rates but not the union rate. The pre-union intraregional exchange rate variability is thus latent; a two-step procedure is developed to measure this. The measured variables are used to model inflation and intraregional trade growth of individual union members. Counterfactual simulations of the union impact are carried out using the resulting models. Application to ASEAN+3 shows that the intraregional variability mainly consists of short-run exchange rate shocks, that the variability significantly affects inflation and intraregional trade of major ASEAN+3 members, and that a union would reduce inflation and promote trade regionwide.

Keywords: Currency; union; Latent; variables; Dynamic; factor; model; Simulation (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:jbfina:v:33:y:2009:i:10:p:1793-1803

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