A Simulation Study of an ASEAN Monetary Union (Replaced by CentER DP 2011-098)

This paper studies the pros and cons of a monetary union for the ASEAN1 countries, excluding Myanmar. We estimate a stylized open-economy dynamic general equilibrium model for the ASEAN countries. Using the framework of linear quadratic differential games, we contrast the potential gains or losses for these countries due to economic shocks, in case they maintain their status-quo, they coordinate their monetary and/or fiscal policies, or form a monetary union. Assuming for all players open-loop information, we conclude that there are substantial gains from cooperation of monetary authorities. We also find that whether a monetary union improves upon monetary cooperation depends on the type of shocks and the extent of fiscal policy cooperation. Results are based both on a theoretical study of the structure of the estimated model and a simulation study.