To Be or Not to Be: An Optimum Currency Area for South Asia?

41 Pages Posted: 17 Aug 2013

See all articles by Krishna Regmi

Krishna Regmi

Lehigh University, Department of Economics, Students

Alex Nikolsko‐Rzhevskyy

Lehigh University - Business School

Robert J. Thornton

Lehigh University - College of Business

Date Written: July 31, 2013

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.

Keywords: South Asia, common currency, SVAR, variance decompositions

JEL Classification: F33, F36

Suggested Citation

Regmi, Krishna and Nikolsko-Rzhevskyy, Alex and Thornton, Robert J., To Be or Not to Be: An Optimum Currency Area for South Asia? (July 31, 2013). Available at SSRN: https://ssrn.com/abstract=2310936 or http://dx.doi.org/10.2139/ssrn.2310936

Krishna Regmi (Contact Author)

Lehigh University, Department of Economics, Students ( email )

27 Memorial Dr W
Bethlehem, PA 18015
United States

HOME PAGE: http://www.krishnaregmi.com

Alex Nikolsko-Rzhevskyy

Lehigh University - Business School ( email )

621 Taylor Street
Bethlehem, PA 18015
United States

HOME PAGE: http://www.nikolsko-rzhevskyy.com

Robert J. Thornton

Lehigh University - College of Business ( email )

Bethlehem, PA 18015
United States
610-758-3460 (Phone)
610-758-4677 (Fax)

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