Testing for contagion in ASEAN exchange rates

Michael McAleer and Jason Chee Wei Nam

Mathematics and Computers in Simulation (MATCOM), 2005, vol. 68, issue 5, 517-525

Abstract: The Asian financial crisis in 1997 brought to the attention of member countries of the Association of South East Asian Countries (ASEAN-5) (comprising Indonesia, Malaysia, the Philippines, Singapore and Thailand) the need for closer monetary co-operation. Central to the OCA literature is the nature and symmetry of underlying economic disturbances. If the economic disturbances are similar across the countries in a region, then the costs of establishing a common currency area are likely to be small. As the presence of contagion necessarily means there is an increase in the correlation of shocks experienced within a region, this paper examines the suitability of establishing a common currency area for ASEAN-5 from the perspective of contagion. In order to select the breakpoints for contagion endogenously, a modified sequential dummy variable method is developed. The empirical results show that contagion is present between all country pairs in ASEAN-5, which indicates that the degree of correlation among the ASEAN-5 economies has increased during the Asian financial crisis.

Keywords: Monetary unification; Optimum currency area; Asymmetric and correlated shocks; Correlated shocks; Parameter stability; Ranking of contagion magnitudes (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:68:y:2005:i:5:p:517-525

DOI: 10.1016/j.matcom.2005.02.008

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