Long-Run Linkages of ASEAN+3 Floating Currencies 6

ABSTRACT: The extent with which currencies of the expanded ASEAN grouping commonly known as the ASEAN+3 have attained long-run currency linkages-an important requisite for an eventual monetary integration-is the main focus of this study. High-frequency interbank call rates (nominal exchange rate vis-à-vis the US dollar) data on seven floating currencies of the region with sufficient historical time series covering the period of 1998 to 2012 (weekly: January 7, 1998, to December 26, 2012-average of bid and ask rates on Wednesdays) constitute the primary database of the study. The goal is to establish through cutting-edge econometric procedures three crucial outcomes: the bilateral dependence of the various currency pairs, informational efficiency in the markets of participating currencies, and the long-run bilateral and multilateral linkages of the currencies. When these outcomes are adequately established, the state of current knowledge on the readiness of the region for currency union and eventual monetary integration is expected to be enhanced. The overall result of the study is quite encouraging to supporters of currency union as all of the three outcomes are adequately established empirically. There is a high level of the currencies' bilateral dependence, both in their level values and in their returns; all markets of the participating currencies exhibit informational efficiency, and there exist a number of significant long-run equilibrium relationships linking the floating currencies of the region. 56

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