Year

2019

Degree Name

Doctor of Philosophy

Department

School of Accounting, Economics and Finance

Comments

ASEAN is a good representative example of regional economic cooperation and integration as well as among developing countries in general. ASEAN was established in 1967 and originally consisted of five members. However, this organization has subsequently achieved deeper and wider political and economic cooperation and expansion to 10 member countries.

Due to changes in the world economy, international economic interdependence and crises, ASEAN members initiated the ASEAN Economic Community (AEC) from December 2015, due to be completed by 2020, with the aim of transforming ASEAN into “a stable, prosperous, and highly competitive region with equitable economic development, and reduced poverty and socio-economic disparities” (ASEAN 2008). The attainment of the AEC in 2020 will represent a major landmark in terms of regional economic integration of ASEAN countries and for East Asia as a whole. The AEC has four objectives; achieving a single market and production base; becoming a highly competitive economic region; attaining equitable economic development; and becoming fully integrated into the world economy.

Achieving high trade openness and more integration to the global economy, however, makes ASEAN economies more vulnerable to external shocks. This may have negative impacts on economic stability and growth which then affect the income gap between and within ASEAN countries. This is because ASEAN member countries may respond differently to common external shocks. As a result, ASEAN may fail to achieve one of its stated pillars for success - equitable economic development in which not only the within-country but also between-countries income gap is narrowed.

In the literature the exchange rate regime is seen as an instrument that can minimise the negative effects of shocks on the stability of macroeconomic variables such as real output, the price level and the real exchange rate. Due to the impacts that these variables have on within-country and between-countries income gaps, the exchange rate regime may also play an important role in limiting the effects of these shocks on these income gaps. Yet this is a relationship that has not been investigated in the literature.

The purpose of this study is to investigate the effects and contribution of various types of shocks, namely a negative foreign demand shock, a positive world real oil price shock and a positive foreign real interest rate shock on key macroeconomic variables, namely real GDP, consumer price index (CPI), real exchange rate, within-country income and between-countries income gap under fixed and flexible exchange rate regimes for the ten ASEAN countries. By doing so, we can find out which exchange rate regime is better in dealing with the negative impacts of external shocks for ASEAN countries. In addition, this study aims to compare between the effects of external shocks on variables under each exchange rate regime to find out which type of shock affects and contributes most to the variables according to each exchange rate regime. Finally, this study attempts to recommend policies for ASEAN countries so that the negative impacts of external shocks on macroeconomic variables and the income gaps can be dealt with. This contributes to the attainments of the AEC.

To do so this study will construct a model for between-countries income gap which deals with the relationship between external shocks, real output, price level, real exchange rate and between-countries income gap. We also develop another model called the within-country income gap model, in order to investigate the relationship between external shocks, real output, price level, real exchange rate and the within-country income gap. To estimate these models, we employ annual data for ASEAN countries covering the period from 1999 to 2014 and the Structural Vector Autoregression (SVAR) approach.

In terms of the stabilities, we find that countries with a flexible exchange rate regime suffer more from external shocks than countries with a fixed exchange rate regime. In particular, in general, real output, real exchange rate and price level fluctuate more to external shocks under a flexible than under a fixed exchange rate regime. Furthermore, external shocks have more long-lasting effects on these variables under a flexible rather than under a fixed exchange rate regime. Moreover, external shocks have insignificant effects on variables in the long-run. The results of accumulated responses show more between-countries and within-country income equality under a flexible rather than under a fixed exchange rate regime exists in the case of a foreign demand shock. However, fixed regime is better than the flexible exchange rate regime in minimising the within-country and between-countries income inequality when a country is beset by a world real oil price shock.

In terms of accumulated effects, a flexible exchange rate regime is superior to a fixed exchange rate regime in absorbing a negative foreign demand shock and a positive foreign real interest rate shock because it generates higher economic growth and lower inflation. Nonetheless, a fixed exchange rate regime outweighs flexible exchange rate regime in coping with a positive world real oil price shock. This is because countries with a flexible exchange rate regime suffer more from a positive world real oil price shock with lower economic growth and higher inflation.

In general, we find that a foreign demand shock and a foreign real interest rate shock are main drivers of the volatility of economic growth. Additionally, a world real oil price shock plays the most important role in explaining the fluctuation of the price level and income gap under both exchange rate regimes. In addition, in terms of accumulated value, an increase in the world real oil price has negative impacts on ASEAN countries because it causes an output contraction, inflation, greater between-countries and within-country income gap.

This thesis makes a number of contributions to the literature. First, this is the first study considering between-countries and within-country income inequality in evaluating the superiority of the exchange rate regime with the presence of external shocks. Second, this is the first time that the de facto exchange rate regime classification by the IMF has been applied in investigating the effects and contributions of external shocks on the economy across exchange rate regimes. Third, this is the first time that a comparison has been attempted to explain the effects and contributions between external shocks under each exchange rate regime for ASEAN countries. Fourth, it is the first study to cover all ten ASEAN countries in investigating exchange rate regime superiority. Fifth, and finally, this study proposes policies that can best deal with external shocks to obtains the targets of the AEC such as macroeconomic growth, narrowing between-countries and within-country income gap.

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Unless otherwise indicated, the views expressed in this thesis are those of the author and do not necessarily represent the views of the University of Wollongong.