THE ROLE OF ASEAN EXCHANGE RATE UNIT (AERU) FOR ASEAN-5 MONETARY INTEGRATION: AN OPTIMUM CURRENCY AREA CRITERIA

Abstract

The idea for regional monetary integration is grounded by the process of convergence theory within the member states. The paper analyses the possibility of monetary union in ASEAN-5 countries, Indonesia, Malaysia, Philippines, Thailand, and Singapore. In terms of volatility, by using nominal deviation indicator assessment, the ASEAN-5 currencies are suggested to peg their national currencies into Yuan since it empirically brings the lowest level of volatility, both during normal and crisis periods. Therefore, Yuan could be proposed as the anchor currency for ASEAN-5 countries. Moreover, valuing the AERU in terms of a weighed average of Yuan is important to determine which countries are considered to be an Optimum Currency Area (OCA). The results statistically suggest that all ASEAN-5 countries could be grouped as OCA according to exchange rate stability criterion. Keywords : Optimum Currency Area, AERU, ASEAN-5, Exchange Rate StabilityJEL Classification : D81, E52, F15, F36