Is a Monetary Union Feasible for D-8 Countries? An Examination in The Framework of The Optimum Currency Area

A monetary union means ensuring unity in exchange rates, eliminating all restrictions on capital movements, and realizing convertibility among member countries. Although this concept is not new, the establishment of the European Monetary Union has led to renewed interests. Applying the European member countries’ experience and knowledge on this subject is crucial for the economic stability and development of Islamic countries. Using the quarterly data of the exchange rate, inflation, interest rate, and trade during 2000–2020, our study tests whether the D-8 is an optimum currency area. Based on the results of the vector error correction model, the impulse response function, and the variance decomposition, it has been determined that the D-8 as a whole is not an optimum currency area. However, Turkey, Nigeria, Egypt, and Malaysia, considered as a subgroup within the D-8, experience relatively similar shocks to their exchange rates, inflation, interest rates, and trade, as compared with the rest of the D-8. Although these countries are geographically fragmented and distant, their theoretical monetary union would be an optimum currency area in terms of the symmetry of their shocks.