A Comment on Empirical Estimation of Patterns of Shocks Utilizing the VAR Methodology on Developing Countries
What is a countr y’s optimal choice of an exchange rate regime? One avenue which has gained prominence is the Optimum Currency Area criteria of pattems of shocks which suggests that a flexible exchange rate may be less costly for regions who face asymmetric shocks, since they are forced to have conflicting policy responses, and vice versa.1 While there are a number of methodologies to calculate the pattems of shocks, the VAR methodology, which results from a technique introduced in Bayoumi and Eichengreen á[1992, 1994]; B&E from now onñ, may be at present one of the most popular. In the estimation of their model the authors have introduced some “over-identifying conditions”2 (called OIC from now on) which confirm the validity of their decomposition.
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