A common currency area for ASEAN? issues and feasibility

This article examines the feasibility of a Common Currency Area (CCA) for ASEAN and the broader ASEAN +5. Using macro-economic data for 14 East Asian countries over the 34-year period 1970-2003, this article addresses whether a Euro style CCA would be well suited for these countries. Issues such as the costs and benefits involved and which countries may be best suited are examined. Previous literature on currency unions have identified synchronous business cycles, similarity in inflation levels and policy congruence to be among essential preconditions. A Vector Autoregression Model and Correlation Analysis is used to examine common linkages among the 14 sample countries. Impulse response functions and variance decomposition is used to identify potential candidates among the 14 countries. The results show an absence of broad-based common linkages. Instead, several paired clusters are identified as potential candidates. The results imply that while a region-wide CCA may not now be feasible, a strategy of beginning with paired clusters and then expanding may be a logical progression if a currency union is a desired objective.