Prior to this era, a monetary agreement seemed to have stalled due to the heterogeneous exchange rate regime in ASIA (Wilson, 2002). This is central to the thought of monetary approach to exchange rate advocate. Price and wage flexibility in and between OCA countries reduces exchange rate adjustment if a shock occurs.
Factor mobility, including labor, among OCA countries minimizes the factor price adjustment and exchange rate shock. With the assumption that the real exchange rate is constant, the equations can be rewritten as The supply-side shock (wages, business cycle, trade cooperation, etc.) has an indeterminate effect on the exchange rate.
Some of Previous Empirical Study
The above studies generally conduct a separated research between exchange rate co-movement and macroeconomic variable co-movement or only observe one aspect. Interaction between exchange rate and macroeconomic variable can be in two ways, all of them are endogenous variables. Thus, a research on exchange rate co-movement only without involving macroeconomic variable will end on misspecification problem.
Special features of these data are the existing autocorrelation phenomenon (current variable value can be explained by the variables value in the past. Many relationships between economic variables that are simultaneous, so according to Sims (1980), those variables should have been treated on the equal footing 3. By using LS technique, relationship obtained is not definitely long term, it may prevail even in sample period.
Thus, it needs a technique that can show the existing equilibrium and linear relationships between variables that are non-stationary but have a stationary error called cointegration. In this paper, the writer tries to make some recoveries based on the aforementioned weaknesses. Modeling that includes exchange rate co-movement (against two currency anchors which are USD and JPY) and other macroeconomic variables (which are price rate, interest rate, national output and money in circulation).
Nevertheless, the writer restricts the relationship form as the exchange rate is a dependent variable and the macroeconomic variable as an independent variable (exogenous). To replace it, it uses an econometric technique called as vector error correction model.
METHODOLOGY
OCA1: endogene variabele: IDR, SGD en exogene variabele: IDUS_INF, IDUS_IRT, IDUS_GRW, IDUS_M1C, SGUS_INF, SGUS_IRT, SGUS_GRW, SGUS_M1C en JPY_FX. OCA2: endogene variabele: IDR, PHP en exogene variabele: IDUS_INF, IDUS_IRT, IDUS_GRW, IDUS_M1C, PHUS_INF, PHUS_IRT, PHUS_GRW, PHUS_M1C en JPY_FX. OCA4: endogene variabele: SGD, PHP en exogene variabele: SGUS_INF, SGUS_IRT, SGUS_GRW, SGUS_M1C, PHUS_INF, PHUS_IRT, PHUS_GRW, PHUS_M1C en JPY_FX.
The form of relationship is short-term if the co-integration variable / error correction term is not significant. The form of the relationship is long-term if the co-integration variable / error correction model is negative and significant11. 11 If error correction is significant and positive, the existing relation is explosive, and this means that the system is not convergent.
The entire coefficient of real GDP difference of ASEAN4 with the US can be positive or negative, but the important thing is the consistency of the direction and it is significant12. Global impact: ASEAN4 currencies have anchor currency that is identical (USD, JPY or USD and JPY). It is indicated by the short-term correlation coefficient matrix (Γiiiii) and the cointegration correlation vector (β) that have the same coefficient symbol (positive) and is significant.
If the intended coefficient on points 1, 2 or 3 does not differ from zero or if it obtains a deviating result, it is concluded that the requirements of OCA from this study have not been met. If the partial model has a better statistical size, it can be concluded that the empirical support of OCA is low at the ASEAN4 level.
RESULT AND ANALYSIS
Pre Test and Model Validation
Bivariate model and complete model is a hypothesis verification phase, so that bivariate model will be a support for complete model. The more algebraic symbols or coefficients that are not significant, the greater the degree of deviation on the existing OCA. Calculation of information criteria for each OCA model (bivariate and complete model) shows that optimal lag is at lag 5.
The cointegration testing procedure is done using the Johansen (1988) technique which is VAR based cointegration testing. The cointegration test result is sensitive to the deterministic component assumed in the model (Johansen, 1995). The data have no deterministic trend and the cointegration equation has no intercept.
13 The best model considered reflecting the cointegration equation will be seen from the information criterion value (used AIC and SIC). As shown in Table IV.6, with the exception of the SGD-PHP covariate, Johansen's cointegration test (1988) shows a significant result. This result provides the first indication in terms of support for hypothesis of the existing OCA in the ASEAN4 area.
Nevertheless, the stricter conclusion should still be achieved through the existing error correction mechanism, which is essential. With the exception of the PHP-THB bivariate, all bivariate OCA models have moderately good model fit (R2) (0.5 to 0.65) (see Table IV.7).
The ASEAN Currencies Co Movement and The Determining Factor
The negative and significant cointegration coefficient is inconsistent with the cointegration test result (Trace dan Max-Eigen statisic) showing 0 (zero) cointegration relationship. Result tending to be contradictory on the above three covariates prompt the author to conclude that there is no equilibrium relationship between Singapore-Thailand (SGD-THB), Singapore-Philippine (SGD-PHP) and Philippine-Thailand ( PHP-THB) means of payment. For these models, the cointegration coefficient has been appropriate with the hypothesis and is significant at the standard level.
In bivariate OCA in which IDR is the independent variable, the coefficient of the control variable itself is generally consistent with the hypothesis and has an appropriate level of significance. For example, OCA changes the IDR-SGD, either a different interest rate variable or the amount of money in circulation (versus the US) has a positive effect on the exchange rate and is relevant to the standard. The other control variables on the bivariate OCA have a coefficient consistent with the hypothesis, although the significance level to be used is aggressive (>10%).
There is an exception to the variable growth difference, in which there is no bivariate OCA where this variable is significant. For example, it can be seen on OCA bivariate SGD-PHP, in which no controlling variable can be called significant at the standard level. On the other hand, the variable symbol is not only consistent with the hypothesis, it happens for example on OCA bivariate SGD-THB (THUS_IRT variable).
In a full model, in which IDR is a dependent variable on the equilibrium equation, the control variable itself: IDUS_INF and IDUS_M1C, has an appropriate symbol with hypothesis and is significant at the standard level (1% and 5% each). Other variables (IDUS_IRT and IDUS_GRW) have the appropriate symbol with hypothesis but are not significant.
The Existing OCA and Its Requirements Assessment
Thus, it can be said by considering all co-movement that there is no reason to accept that the equilibrium relationship can be explained by the JPY movement. IDR-SGD, every 1% appreciation/depreciation on SGD (vs. USD) will be accompanied by 0.88%15 appreciation/depreciation on IDR. IDR-PHP, every 1% appreciation/depreciation on PHP (vs USD) will be accompanied by 0.37%(layer 5)-0.38%(layer 4) appreciation/depreciation on IDR c.
For a full model of partial interpretation16, the relationship that occurs will be a 1% appreciation/depreciation on PHP accompanied by a 0.17% appreciation/depreciation on IDR. There is an exception to SGD because the direction of motion associated with it is opposite (and significant). A look at this analysis shows that there is a possibility of existing co-movement that is statistically significant among ASEAN4 currencies.
This is due to (1) the weak significance of the short-term co-movement coefficient and (2) the non-homogeneous error correction coefficient symbol and long-term co-movement. Then it can be seen that the national output gap variable (IDUS_GRW) is never an influential variable. Their analysis of the convergence of prices and production in some areas of the world finds that there is an area defined as the USD area.
This characteristic is sufficient if used to explain the OCA model where IDR takes the role as a related variable. It is assumed that there is a different mechanism in determining the IDR exchange rate compared to other ASEAN countries4.
CONCLUSION AND SUGGESTION
The monetary variable (the amount of money in circulation and the interest rate empirically play a role in determining the IDR exchange rate. Thus, the authority (Bank of Indonesia) should pay attention to its monetary process to prevent any shock to the exchange rate Instead, monetary policy can take an active role in the exchange rate process to be consistent with economic stability.
The mechanism/factors of exchange rate determination that are not homogeneous among ASEAN4 countries show that specific-domestic shock is still dominant (idiosyncratic shocks) in the determination of exchange rate. Barro dan Sylvana Tenreyro, ΔOptimal Currency AreasΔ, National Bureau Of Economic Research, Working Paper No. Bilson, John F.O ≈Recent Developments In Monetary Models Of Exchange Rate DeterminationΔ, IMF Staff Paper No.
Monetary and Exchange Rate Policy Coordination in ASEAN+1Δ, National Bureau of Economic Research, Working Paper No. A., ≈A Monetary Approach to Exchange Rates: Doctrinal Aspects and Empirical EvidenceΔ, Scandinavian Journal of Economics pp. 200-24. Δ Is Japan Creating a Yen Bloc in East Asia and the Pacific? Δ, National Bureau of Economic Research, Working Paper No.
Kim, TJ en Ryou, JW, ≈The Optimum Currency Basket and The Currency Bloc in AsiaΔ, Bank Of Korea Economic Papers, deel 4, nr. Mongeli, Fransesco P.≈New Views on The Optimum Currency Area Theory: What Is EMU Telling VS?Δ, ECB-werkdocument nr.
