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A Search for an Optimum Currency Area Partners for Pakistan

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Author Info
Farooq Rasheed (Pakistan Air Force Karachi Institute of Economics and Technology, Karachi.)
Javed A. Ansari (Pakistan Air Force Karachi Institute of Economics and Technology, Karachi.)

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Abstract

This paper empirically examines the existence of a common trend between the exchange rates of Pakistan and four regional countries (Bangladesh, India, Saudi Arabia, and Sri Lanka) with two of their major trading partners (the United States and Japan) as base countries. Results from cointegrating analysis show that the strongest evidence points to the existence of common stochastic trends between the Pakistani rupee, on the one hand, and the Bangladeshi Taka and the Sri Lankan rupee, on the other hand. There is no strong evidence for the existence of a common stochastic trend between the Pakistani rupee and the currencies of India and Saudi Arabia. Optimum Currency Area (OCA) theory seems to justify the formation of a currency union between Pakistan, Bangladesh, and Sri Lanka. The case of a currency union between Bangladesh and Pakistan is strengthened by a shared political past and a shared history of financial institutional development. The immediate impact of the formation of such union on Pakistan’s GDP growth will however be insignificant.

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Publisher Info
Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

Volume (Year): 43 (2004)
Issue (Month): 4 ()
Pages: 793-811
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Handle: RePEc:pid:journl:v:43:y:2004:i:4:p:793-811

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Keywords: Currency; pakistan;

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References listed on IDEAS
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  1. Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic Journal, Royal Economic Society, vol. 108(449), pages 1009-25, July. [Downloadable!] (restricted)
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  2. Patel, Jayendu, 1990. "Purchasing Power Parity as a Long-Run Relation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(4), pages 367-79, Oct.-Dec.. [Downloadable!] (restricted)
  3. Vahid, F & Engle, Robert F, 1993. "Common Trends and Common Cycles," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(4), pages 341-60, Oct.-Dec.. [Downloadable!] (restricted)
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  4. Barry Eichengreen & Tamim Bayoumi, 1996. "Is Asia an Optimum Currency Area? Can It Become One? Regional, Global and Historical Perspectives on Asian Monetary Relations," Center for International and Development Economics Research, Working Paper Series 1033, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
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  5. Enders, Walter, 1988. "ARIMA and Cointegration Tests of PPP under Fixed and Flexible Exchange Rate Regimes," The Review of Economics and Statistics, MIT Press, vol. 70(3), pages 504-08, August. [Downloadable!] (restricted)
  6. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR, CES, MSH, vol. 15(30), pages 7-46, 04. [Downloadable!] (restricted)
  7. Engle, Robert F & Kozicki, Sharon, 1993. "Testing for Common Features," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(4), pages 369-80, October.
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  8. Adler, Michael & Lehmann, Bruce, 1983. " Deviations from Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 38(5), pages 1471-87, December. [Downloadable!] (restricted)
  9. Eatzaz Ahmad & Amber Naz, 2000. "An Empirical Analysis of Convergence Hypothesis," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 39(4), pages 729-740. [Downloadable!]
  10. Engle, Robert F & Kozicki, Sharon, 1993. "Testing for Common Features: Reply," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(4), pages 393-95, October.
  11. Bayoumi, T. & Eichengreen, B., 1994. "One Money or Many? Analysing the Prospects for Monetary Unification in Various Parts of the World," Princeton Studies in International Economics 76, International Economics Section, Departement of Economics Princeton University,.
  12. Barry Eichengreen & Tamim Bayoumi, 1996. "Ever Closer to Heaven? An Optimum-Currency-Area Index for European Countries," Center for International and Development Economics Research, Working Paper Series 1036, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
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