Currency cointegration and global financial crisis: The case of ASEAN currencies.

Abstract

This study examines the short-run causality and the long-run cointegrating relationships among ASEAN national currencies prior to and after the 2008 Global Financial Crisis (GFC) with the aim to assess the ASEAN's readiness to form an Optimal Currency Area (OCA). We support the notion that ASEAN is not ready to become an OCA. as the linkages among national currencies appear to vanish due to varying responses to an asymmetric external economic or monetary shock toward the region. In addition, there are only weak and scatter (ing) ties among the currencies. In contrary to the findings in the extant literature, we find that a financial crisis does not always lead to a more cointegrated currency group as there is a strong evidence of cointegrating relationships among ASEAN currencies prior to the 2008 Global Financial Crisis, bur there is only a minimal pairwise relationship and no long-term linkage among the currencies after the crisis. We observe that nature of the crisis could take part in explaining the effect of a financial crisis on currency cointegration.