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Intra-Industry Trade and Business Cycles in ASEAN

[journal article]

Cortinhas, Carlos Jose Ferreira

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Abstract A new resolve for both increased economic integration and monetary and exchange rate cooperation has started to emerge in ASEAN, especially since the 1997-1998 Asian financial crisis. According to the optimum currency area theory, the degree of trade integration is one of the most important criteria for joining a currency union. The large increase in intra-ASEAN trade in recent years raises the question of whether the ASEAN countries are becoming better prepared to form a currency union. This paper sets to test whether the recorded increase in intra-ASEAN trade is leading the ASEAN members to closer economic integration and thus to better satisfy the criteria for a common currency. Two separate models are estimated for that purpose. First, a variation of the model of Frankel and Rose (1997) was estimated for the ASEAN members. Next, a new panel data methodology was conducted. The results with our own model were very significant and robust when four of the ASEAN5 countries were considered, and showed a clear positive correlation between intra-industry trade and business cycle synchronization in ASEAN. This result has important implications for the prospects of the creation of a common currency in the region.
Document language English
Publication Year 2007
Page/Pages p. 893-902
Journal Applied Economics, 39 (2007) 7
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)