IS SOUTH ASIAN ASSOCIATION OF REGIONAL COOPERATION AN OPTIMAL CURRENCY AREA? AN EMPIRICAL ANALYSIS

Abstract

This study examines the feasibility to form a common currency area in the South Asian Association for Regional Cooperation (SAARC) countries. A group of countries facing symmetric shocks are benefited to introduce a common currency. This thesis employs a five-variable Structural Vector Autoregressive (SVAR) model to test the symmetry of five types of shocks i.e., external global and regional; domestic supply, interest rate and exchange rate shocks. The results show asymmetric correlations among domestic shocks. In addition, lower factor mobility, lower degree of intraregional trade, and lack of political integration suggest that the SAARC countries are not yet ready to introduce a common currency.