Examining the Possibility of Introducing a Common Currency for ASEAN - An Empirical Analysis of Symmetry of Shocks

This paper examines the possibility of introducing a common currency for nine ASEAN countries by analyzing symmetry of shocks between these countries using the structural VAR method developed by Blanchard and Quah (1989), and data on CPI and GDP. Two new contributions of the paper are the inclusion of four ASEAN countries (Vietnam, Laos, Cambodia and Myanmar) in the analysis, and the emphasis on the consistency in the signs of responses of GDP and CPI across the countries to structural shocks. The results imply that ASEAN as a whole does not form an optimum currency area, but a group of Indonesia, Malaysia, Singapore, Thailand and the Philippines with high correlations between structural shocks and fast speed of adjustment to shocks, is suitable for a common currency. The results also show that the signs of responses to the same shock are not necessarily consistent across the countries, implying a problem on the validity of the Blanchard-Quah VAR method in analyzing the symmetry of shocks