The Feasibility of Optimal Currency Area for ASEAN after adopting the ASEAN Economic Community Blueprint in 2008

Abstract: This paper investigates the feasibility of OCA for ASEAN after the implementation of ASEAN Economic Community Blueprint in 2008. Dynamic Conditional Correlation (DCC) model with and without a structural break are used to identify whether the policy implemented facilitates the region to move closer to a single currency area. Industrial production index growth rate and change in short-term interest rate for ASEAN founders (Indonesia, Malaysia, Philippines, Singapore, and Thailand) from the period of 2001-2013 are selected as a proxy for OCA and Maastricht criteria respectively, which are cited as significant factors for successful functioning of OCA. The results show that there is a structural break for most conditional correlation of country pairs of the two variables after the implementation of integration policy in 2008 and that most of the conditional correlations decrease over time. The results imply that the whole region diverges away from OCA and Maastricht criteria and that the feasibility of OCA is decreased. As discussed by a number of previous researches regarding the issue, there is a possibility that higher economic integration resulted from integration policy may cause economic divergence due to specialization in industry of country members. For higher effectiveness of future integration policy formulation, a formal quantitative testing is required in order to precisely identify that higher economic integration causes higher specialization in the industry and, hence, more divergence in business cycle.