ASEAN Monetary Cooperation: issues and prospects

Among other things, the 1997–98 East Asian financial crisis has led to questioning within the Association of Southeast Asian Nations (ASEAN) about whether the region needs a common currency. This paper aims to discuss the underlying economic issues and prospects, from both a theoretical and a practical point view. The analysis focuses only on the five largest ASEAN nations. Standard criteria suggested by the theory of Optimal Currency Areas are reviewed and applied to the region. The paper then provides a discussion on possible steps that can be pursued to realize currency union

Reliability of Structural Shocks Estimates from a Bivariate SVAR Model - The Case of Southeast Asian Countries

In order to assess the symmetry in the nature of structural shocks for a bloc of countries to form a currency union, long-run identifying restrictions to simple bivariate models are often used. This study attempts to assess the reliability of the estimated structural shocks produced from applications of these kinds of models by looking at their consistency in representing the designated shocks. The case examined covers some countries in the Southeast Asian bloc. The finding suggests that the commingling shocks problems exist. Exercise using larger models and higher frequency data is then advisable.Structural Shocks Estimates, Bivariate SVAR Model, South East Asia

Economic Growth And Government Size In Indonesia: Some Lessons For The Local Authorities

The relationship between economic growth and government spending (the size of the government involvement in economic activity) is an interesting issue that has been a subject of controversy and debate. The direction of how government size associates with economic growth has so far been inconclusive. This paper attempts to examine the relationship between both variables for the case of Indonesia. The issue would be of interest for it provides room to examine the impact of government size on economic growth in the country. Furthermore, in the light of the undergoing process of fiscal decentralization in Indonesia, it also provides some lessons for the local authorities in the provincial and district level. To investigate the relationship, a sample of time series data from 1969 to 1999 on Indonesia is being used. The result of the econometric estimation suggests that economic growth is negatively associated with government size both in the long run and in the short run. Some possible explanations and interpretations on the finding are provided for this tendency of growth impeding nature of the relative government size in the economy. Then, some lessons for the local authorities in managing their own budget are being drawn as a note of cautions.economic growth, government spending

Assessing Monetary Policy Efficiency in the ASEAN-5 Countries

This paper investigates whether or not monetary policy has been conducted efficiently in five selected ASEAN economies. It derives a utility-consistent social loss function, as a metric for welfare, to assess monetary policy efficiency in a small open economy model. An optimal monetary policy that minimises the social loss function is solved using information on structural parameters estimated for a model that represents each of the selected ASEAN-5 countries. The results are largely consistent with common wisdom in the literature, where policies based on credible commitment give the best welfare outcome. The paper further examines the welfare implications of the currently adopted simple monetary policy feedback rule for each of the sample economies. This exercise points out that there is room for improving the performance of monetary policy in each country, and it should be explored further. It also suggests the possibility that monetary authorities in the sample countries may be optimising over an objective function that di§er from the social welfare function derived in the paper.ASEAN, monetary policy, optimal policy rules, social welfare function

Approximating Monetary Policy: Case Study for the ASEAN-5

Empirical studies on the process of monetary policy making in a number of advanced economies have shown that a simple policy reaction function (PRF) performs well in explaining the setting of monetary policy. This paper examines an application of a simple PRF in an attempt to broaden the understanding of monetary policy making processes in five developing ASEAN countries. As found to be the case in the more advanced economies, a simple PRF is also found to perform well in explaining the setting of monetary policy in these countries. Moreover, the findings uncover the main drivers behind the conduct of monetary policy and provide a relatively consistent explanation about the monetary policy episodes in the sample economies.Monetary policy, policy reaction function, ASEAN

ASEAN Monetary Cooperation : Issues and Prospects

Among other things, the 199798 East Asian financial crisis has led to questioning within the Association of Southeast Asian Nations (ASEAN) about whether the region needs a common currency. This paper aims to discuss the underlying economic issues and prospects, from both a theoretical and a practical point view. The analysis focuses only on the five largest ASEAN nations. Standard criteria suggested by the theory of Optimal Currency Areas are reviewed and applied to the region. The paper then provides a discussion on possible steps that can be pursued to realise currency union.ASEAN, Monetary cooperation, exchange rates

Optimum Monetary Instrument Option in the Case of a Small Open Economy

This essay examines the choice of monetary policy instrument for a small open economy under flexible exchange rate regime with some reference to Indonesia. To approach the issue a simple ad-hoc aggregate supply-IS-LM model is used for the analysis. Although basically the issue concerning monetary instrument problem tend to be more empirical rather than theoretical, this essay argues that some rules of thumb could still be drawn from the analysis of the theoretical model to solve the problem. The recognition of the true behavioural relationship among aggregate variables in the economy is important as guidance for the optimal policy rule. The analysis also recognises that a credible commitment from the monetary authority towards the instrument chosen is important.Monetary policy, small open economy

Simple Model for a Small Open Economy: An Application to the ASEAN-5 Countries

This paper examines the suitability of a simple structural small open economy model in characterising the economic dynamics in five ASEAN economies. The model is a variant of a small open economy model with imperfect competition and nominal rigidities. It is then confronted to the data using maximum likelihood estimation. The structure of the underlying model is able to produce estimated parameters that largely capture the economic characteristics and dynamics of each of the economies in a plausible manner. It enables one to compare and contrast the behaviour of the five economies under consideration, particularly their monetary transmission mecha- nism. The estimation results are then used to revisit the structural shocks correlation issue in the region, and can also be used as the basis for constructing the relevant approximation for the aggregate welfare function for each of the economies.ASEAN, small open economy model, maximum likelihood estimation

The Impact of Monetary Policy on Financial Markets in Small Open Economies: More or Less Effective During the Global Financial Crisis?

This paper estimates the impact of monetary policy on exchange rates and stock markets for eight small open economies: Australia, Canada, the Republic of Korea, New Zealand, the United Kingdom, Indonesia, Malaysia and Thailand. On average across these countries, a one percentage point surprise rise in official interest rates leads to a 1% appreciation of the exchange rate and a 1% fall in stock market indices. The effect on exchange rates is notably weaker in the non-Organization for Economic Cooperation and Development (OECD) countries with a managed float. For the OECD countries, there is no robust evidence of a change in the effect of policy during the global financial crisis. For the non-OECD countries, there is some evidence of a stronger effect of policy on stock markets during the crisis, although further research is needed to investigate whether this is a result of measurement issues.Monetary policy effectiveness; exchange rate; stock prices; crisis; Asian economies