Effect of Exchange Rate Uncertainty on Trade Integration in ASEAN+3

초록

Having focused on exchange rate, much of the controversy is linked to the choice of a process to represent the evolution of exchange rate, which is crucial to measure the impact of uncertainty on trade and investment decisions. It is also necessary to choose a movement that reflects as likely as possible the dynamics of the world exchange market (Postalli and Picchetti, 2006), and then its effect on trade. One way is trade integration which increases countries’ economic relationship, but it may cause trade deviation due to exchange rate uncertainty. On the other hand, trade creation effects mostly result from an economic union through eliminating exchange rate uncertainty if a common currency arrangement is implemented properly (Sabri et al., 2012). The objective of this study is to investigate the relationship between exchange rate uncertainty and trade integration in ASEAN+3 over the period 1995-2014. Exchange rate uncertainty is measured by Geometric Brownian Motion (GBM). The GBM is a continuous-time stochastic process, which follows a Brownian motion. Accordingly, the evaluation of exchange rate uncertainty is carried out by estimating an integration trade model using panel data approach. Estimation results have indicated that the effect of the exchange rate uncertainty on trade integration in ASEAN+3 has been significant and negative. The implication is that any shock to the exchange market may be harmful to trade integration in ASEAN+3.

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