The suitability of ASEAN for a regional currency arrangement

This paper examines the costs, benefits, preconditions, and implications of an ASEAN regional currency arrangement that is assumed to culminate in a regional currency. Such a proposal would have been regarded as highly radical even a decade ago, and would hav been unlikely to be considered as a serious policy option along with fixed and floating exchange rates. However, recent international financial crises have eroded the credibility of unlateral fixed exchange rates and correspondingly increased interest in 'harder' pegs, such as currency boards, adopting another country's money as the domestic currency, and common currency arrangements. Our choice of ASEAN as the object of our analysis, rather than alternative geographical areas such as-say-East Asia, or Asia as a whole, is primarily determined by the ASEAN policy makers' interest in this possibility. Indeed, ASEAN is a region where some (but by no means all) policy makers are seriously considering the possibility of moving toward a common currency. An earlier version of this paper was prepared at the request of the ASEAN member central banks to contribute to their deliberations. Very recently (May 2000), the ASEAN countries plus China, Korea, and Japan (ASEAN+3) unveiled the 'Chiang Mai Initiative,' whereby they committed themselves to strenthening a network of swap and repurchase agreements among their monetary authorities. The analytical approach used in this paper mght be applied to alternative potential common currency areas, such as ASEAN+3: compared with ASEAN, such a larger region would have the advatage of a greater share of common trade and the disadvantage of greater asymmetrics in the economic shocks affecting its constituent countries.