Testing for the possibility of a monetary union in the ASEAN+3 countries: rationality and asymmetric loss functions

Abstract

This study uses market variables, such as the rates of foreign exchange, interest and inflation, to determine if a market-led monetary integration in the ASEAN+3 countries is possible. Following Batchelor and Peel (1998), rationality is revealed in the presence of an asymmetric Linex loss function. In order to generate an expected value for a target variable, arithmetically weighted, pseudo-numeraire and Auto-Regressive Integrated Moving Average (ARIMA(1,1,1)) process information matrices are generated. It is found that certain preconditions have to be fulfilled in the ASEAN+3 countries for monetary unification to take place and that this process must be gradual. In particular, an economic infrastructure has to be built to strengthen foreign exchange markets in this region.

Keywords:

• monetary union
• rationality
• asymmetric Linex loss function
• GARCH-M model

JEL Classification:

• F02
• F33

Acknowledgments

I performed this research in 2006–2007 as a Visiting Scholar at the Faculty of Economics and Politics, University of Cambridge, Sidgwick Avenue, Cambridge, UK.