ASEAN Diversity, Business Cycle
Synchronization, and Monetary Coordination:
Insights from a VAR/VECM Model of Three
ASEAN Member States
Dr. Ruperto Majuca and Neriza Casas
Philippine Economic Society Annual Meeting
November 2014 (Makati, Philippines)
Outline
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Research Questions and Methodology
Vector Autoregression (VAR) Results
Vector Error Correction Model (VECM) Results
Policy Implications
Table of Contents
 Research Questions and
Methodology
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Vector Autoregression (VAR) Results
Vector Error Correction Model (VECM) Results
Policy Implications
Research Questions and Methodology, 1
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Optimal amount of monetary and exchange rate
coordination among ASEAN member
economies (AMS), depends, among others, on
whether economic shocks are country-specific or
common, as well as on the heterogeneity of
macroeconomics dynamics, and in monetary and
exchange rate regimes
Are the ASEAN economic shocks countryspecific or common?
Research Questions and Methodology, 2
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Vector autoregression (VAR) and vector error
correction model (VECM) models were
estimated to analyze the diversity and
commonalities of three “representative” ASEAN
member states (AMS).
VAR mainly for commonalities, and VECM
(along with descriptive data) for diversity
Singapore for developed country, Philippines for
ASEAN5, and Vietnam for CLMV
Table of Contents
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Research Questions and Methodology
 Vector Autoregression (VAR)
Results
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Vector Error Correction Model (VECM) Results
Policy Implications
Vector Autoregression (VAR)
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VAR containing real GDP growth of:
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ROW (Australia, Canada, Denmark, New Zealand, Norway,
Sweden, Switzerland, UK, US, Korea, Mexico, South Africa,
and Taiwan)
ASEAN6 (Indonesia, Malaysia, Philippines, Singapore,
Thailand, and Vietnam)
AMS
VAR (ROW, ASEAN, Singapore), 1
VAR (ROW, ASEAN, Singapore), 2
VAR (ROW, ASEAN, Singapore), 3
VAR (ROW, ASEAN, Singapore), 4
VAR (ROW, ASEAN, Singapore), 5
VAR (ROW, ASEAN, Philippines), 1
VAR (ROW, ASEAN, Philippines), 2
VAR (ROW, ASEAN, Vietnam), 1
VAR (ROW, ASEAN, Vietnam), 2
Table of Contents
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Research Questions and Methodology
Vector Autoregression (VAR) Results
 Vector Error Correction
Model (VECM) Results
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Policy Implications
Data and Methodology
We use Quarterly data: of Singapore, Philippines,
and Vietnam
Gross Domestic Product (GDP), M1 Money Supply
(LMB), Key Policy Rate (FUND), Treasury Bill
Rates (tbill), CPI (Cpiinf) and M2 (m2sareal),
money market rate (mmr)
 From International Monetary Fund, Thomsom Reuters,
and Bloomberg
Impulse Response Function
Singapore (to Interest Rate)
Impulse Response Function
Philippines (to Interest Rate)
Impulse Response Function
Viet Nam (to Interest Rate)
Table of Contents
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Research Questions and Methodology
Vector Autoregression (VAR) Results
Vector Error Correction Model (VECM) Results
 Policy Implications
Policy Implications, 1
On the one hand, intrinsic differences among the
characteristics of the individual ASEAN economies
pose a challenge for regional macroeconomic
coordination (e.g. VECM evidence)
Policy Implications, 2
On the other hand, the VAR findings also highlight
the need for a strong coordinated macroeconomic
monitoring in the ASEAN region to ensure that
AMSs maintain robust macroeconomic conditions,
as well as the importance of coordinated efforts to
strengthen prudential regulation in the region. At
the same time, it is also important to have a buffer
and support mechanism in case of negative shocks
Policy Implications, 3
There is a possible scope for closer
macroeconomic policy coordination within the
ASEAN region.
As Kawai (2005) argued, common threats can be
addressed through collective action, and spillovers
and externalities that come about because of the
interconnectedness of the economics can be
internalized through macroeconomic policy
coordination.
Policy Implications, 4
Current system is not sufficient. To support deeper
integration, the region should have an
institutionalized mechanism to coordinate the
monetary, exchange rate and fiscal policies among
member states. To achieve this, stronger political
will is required.
Policy Implications, 5
In the long-term, one could envision a system
where the member states give up some of
their independence and in exchange, earn a
vote in the regional decision making process
for decision.