Economic integration in South East Asia

In recent years, the South East Asian economies have been moving towards closer regional integration. One of the major steps taken was the creation of the ASEAN Free Trade Area (AFTA) with the final aim of creating an ASEAN free trade area by 2003. The South East Asian countries started liberalizing their stock markets and financial sector beginning late 1980s.; The first chapter examines the factors relevant to the formation of a currency union. I will calculate the degree of symmetry of shocks for the South East Asian countries using a structural vector autoregression identified using restrictions on the long-run coefficient matrix (Blanchard and Quah (1989)). The results from the estimation show that the South East Asian countries have more symmetric shocks than European Union countries. Compared with the NAFTA countries, the ASEAN countries have more symmetric external shocks but less symmetric supply and demand shocks. Other criteria examined include intraregional trade and factor mobility. The second chapter examines the linkages among the South East Asian stock markets following substantial liberalization in the 1990s. A time-varying parameter model is used to examine whether linkages across the stock markets have changed as a result of liberalization. The results show that the stock market returns of Indonesia, the Philippines and Thailand all became more closely linked with that of Singapore. The third chapter examines the degree of financial market integration in the South East Asian economies by using the concepts of covered interest parity, ex post uncovered interest parity and ex post real interest parity. Singapore exhibits the smallest deviations from the parity conditions, followed by Malaysia and Thailand, the Philippines and Indonesia. There was little change in the deviations over the period despite substantial liberalization. The Johansen cointegration test could not find any evidence of long-run relationship between the nominal and real interest rates over the entire sample period. However using the rolling window cointegration technique, there is evidence that the nominal interest rates of Malaysia and Singapore are cointegrated with that of the USA until 1993.