Intra-Industry Trade, Specialisation and Business Cycles in ASEAN

Recently, a new resolve for both increased economic integration and monetary and exchange rate cooperation has started to emerge in ASEAN, especially since the 19971998 Asian financial crisis. According to the optimum currency area theory, the degree of trade integration is one most important criterion for joining a currency union. The large increase in intra-ASEAN trade in recent years naturally raises the question of whether the ASEAN countries are becoming better prepared to form a currency union. This paper sets to test whether the recorded increase in intra-ASEAN trade is leading the ASEAN members to closer economic integration and thus to better satisfy the criteria for a common currency. Two separate models are estimated for that purpose. First, a variation of the model of Frankel and Rose (1997) was estimated for the ASEAN members. As the results were not very significant, a new methodology that uses the whole sample period data instead of dividing the data into sub-periods was conducted. The results with our own model were very significant and robust, and showed a clear positive correlation between intra-industry trade and business cycle synchronization in ASEAN. This result has important implications for the prospects of the creation of a common currency in the region. Keywords; Intra-Industry Trade; Business Cycle Harmonization; Economic Integration; Asean. JEL Classifications: F15; F33; E42 1 E-mail: [email protected]