Monetary union in Southeast Asia: An assessment of the optimum currency area theory*

Abstract

This paper applies optimum currency area (OCA) theory to Southeast Asia to assess the potential for a monetary union in that region. We construct a panel of 10 Southeast Asian countries over the period 1990–2018 and apply the dynamic OLS estimator to quantify the costs and benefits of a potential OCA. A possible monetary union in Southeast Asia is vulnerable to asymmetric shocks, although the degree of specialisation has decreased and the openness index increased. Estimates confirm that both OCA criteria favour an increase in the region's income and FDI inflows and a reduction of its unemployment rate. However, inadequate labour mobility and stagnating intra-trade shares are major obstacles in this regard, but if addressed they could benefit economic development and GDP per capita in the ASEAN region. We conclude that Southeast Asia is far from being an optimum currency area, but if it were to form a common currency area, the loss of economic sovereignty and its costs would be more than offset by the resulting monetary efficiency gain.