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A Search for an Optimum Currency Area Partners for Pakistan

Author

Listed:
  • 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.)

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.

Suggested Citation

  • Farooq Rasheed & Javed A. Ansari, 2004. "A Search for an Optimum Currency Area Partners for Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 43(4), pages 793-811.
    • Handle: RePEc:pid:journl:v:43:y:2004:i:4:p:793-811
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    File URL: http://www.pide.org.pk/pdf/PDR/2004/4/PartII/Farooq%20Rashid.pdf
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    References listed on IDEAS

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    Cited by:

    1. Md. Abdur Rahman Forhad, 2014. "How many currencies in Saarc countries? a multivariate structural var approach," Journal of Developing Areas, Tennessee State University, College of Business, vol. 48(4), pages 265-286, October-D.

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