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To be or not to be: An optimum currency area for South Asia?

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  • Regmi, Krishna
  • Nikolsko-Rzhevskyy, Alex
  • Thornton, Robert

Abstract

This paper empirically investigates whether South Asian countries constitute an optimum currency area (OCA) by applying a structural vector auto-regression (SVAR) model to trace global, regional, and domestic shocks. Variance decomposition shows that domestic shocks dominate regional and global shocks, which contrasts with our findings for the European Union countries, used as a basis for comparison. We conclude that at the present time the South Asian region as a whole does not meet the prerequisite conditions of an OCA. The loss of an autonomous monetary instrument can outweigh the benefits of a common currency.

Suggested Citation

  • Regmi, Krishna & Nikolsko-Rzhevskyy, Alex & Thornton, Robert, 2015. "To be or not to be: An optimum currency area for South Asia?," Journal of Policy Modeling, Elsevier, vol. 37(6), pages 930-944.
  • Handle: RePEc:eee:jpolmo:v:37:y:2015:i:6:p:930-944
    DOI: 10.1016/j.jpolmod.2015.09.005
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    Keywords

    South Asia; common currency; SVAR; Variance decompositions;

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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