Monetary policy synchronization in the ASEAN-5 region: an exchange rate perspective

Abstract

In light of the long-standing vision of economic and monetary integration in the ASEAN (Association of Southeast Asian Nations) region and the importance of coordinating monetary policies to achieve it, the objective of this article is to assess the monetary policy synchronization among the founding members of the ASEAN, that is, Indonesia, Malaysia, the Philippines, Singapore and Thailand. Due to the importance of exchange rate movements to monetary policies, we approach this issue from a currency exchange rate perspective. Specifically, multivariate trend–cycle decomposition is employed to investigate common trends and common cycles among the exchange rates of these countries during the period 1976–2012. Our analysis reveals that the real exchange rates of Malaysia, the Philippines, Singapore and Thailand share common cycles in the short term and have common trends in the long term, but the Indonesian currency does not share these relationships. Thus, our results augur well for the synchronization of monetary policies among Malaysia, the Philippines, Singapore and Thailand. In contrast, the relatively turbulent dynamics of the Indonesian rupiah evident in frequent bouts of stark depreciation separated by periods of steady depreciation over the past three decades raise questions regarding the readiness of Indonesia for participating in a monetary alliance with the ASEAN-4 nations.

Keywords:

• exchange rate
• common features
• monetary union
• ASEAN

JEL Classification:

• F31
• F33
• F36

Notes

¹ ASEAN-5 economies refer to the economies of the founding members of the Association of Southeast Asian Nations – Indonesia, Malaysia, the Philippines, Singapore and Thailand.

² The trade-to-GDP ratios have been calculated by dividing the sum of exports and imports by GDP.

³ For the elaborative task assigned to Chiang Mai Initiative (CMI), please see Sun and Simons (2011).

⁴ Initially, Vahid and Engle (1993) examined the presence of common trends and common cycles among per capita consumption and income, Engle and Issler (1993) investigated trend–cycle decomposition among per capita GDP of Argentina, Brazil and Mexico, and later Engle and Issler (1995) examined the presence of trend and cyclical components among the outputs of various sectors of the USA. Recently, a number of researchers (e.g. Beine et al., 2000; Sharma and Wongbangpo 2002; Sato and Zhang 2006; Abu-Qarn and Abu-Bader 2008; Adom et al., 2010; Basnet and Sharma 2013b) have used the common trend and common cycle approach among a set of macrovariables to investigate the feasibility of a monetary/economic union in a group of countries. Adom et al. (2010) have given a detailed justification as to how this methodology is superior to the one proposed by Blanchard and Quah (1989) and used by researchers earlier.

⁵ In the context of the 1997/98 financial crisis in East Asia, researchers have utilized a variety of ways (such as providing pre- and post-crisis estimations (Wilson and Choy, 2007), using a dummy variable (Sun and Simons, 2011) or using the entire period without any breakdown (Rhee, 2012), etc.) to deal with a structural change issue caused by the crisis. In an attempt to take care of this issue, we re-estimated Model B by excluding the 15 months (July 1997 to September 1998) of the crisis period. However, we did not find any qualitative difference in the results. One of the goals of this study is to investigate whether or not the ASEAN countries demonstrate comovement in their trend and cyclical components during the crisis period. Therefore, only the results of whole period are reported; the results of the excluding period are not reported in the paper, but are available upon request.

⁶ This decomposition is explained in detail in Vahid and Engle (1993, pp. 346–7).

⁷ However, the existence of cointegrating relationship does not imply that the countries under consideration do not differ in their policy implementation over time. At best, it simply means that any deviation in the short run will be corrected by internal dynamics that pushes these economies back towards equilibrium path in the long run (Darrat and Al-Shamsi, 2005).

⁸ We are not suggesting that the objective of exchange rate stability is necessarily inconsistent with that of price level stability.