How Many Currencies in SAARC Countries?: A Multivariate Structural VAR Approach

Forhad, Md. Abdur Rahman

doi:10.1353/jda.2014.0062

Cited by 2 publications

(1 citation statement)

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“…Symmetric policies of ACU members can have complementary effect on deeper economic integration, such as custom and economic union, apart from indicating the efficacy of such policies (Banik and Yoonus, 2014). Earlier studies have found that gross domestic product (GDP) of most of the ACU member countries respond similarly to symmetric external shocks (Forhad, 2014). It will be of interest for managers of ACU and for proponents of ICUs to evaluate whether such institutions have brought about symmetric changes to EMP as well.…”

Section: Introductionmentioning

confidence: 99%

Effect of International Clearing Union on exchange market pressure

Shekhawat

Kathuria

2018

JES

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Purpose The purpose of this paper is to enhance our understanding of effects of International Clearing Unions on the exchange market pressure (EMP). Using Asian Clearing Union (ACU) as an example of a typical International Clearing Union, the authors infers that ACU has not been very successful in synchronizing the EMP in the region. Other countries that are not members of such clearing union but are interested in monetary cooperation with other countries should consider the behavior of their EMP indices before attempting any form of integration. The study also provides a generic methodology for using EMP as an indicator for predicting the feasibility of monetary cooperation across countries. Design/methodology/approach An EMP model using the median absolute deviation is derived to reflect the policy preferences of each country. The weights for change in foreign reserves and interest rate differential are derived using analytical models. The index is then applied to ACU as a case study using monthly data from 2006 to 2015 for Bhutan, Bangladesh, Nepal, India, Pakistan, Sri Lanka and Iran. The descriptive statistics are studied to find the possibility of short-run relationship between the exchange rates, foreign exchange reserves and interest rate differential. The longitudinal data set generated is checked for cointegration to evaluate the EMPs of the countries. Findings The study finds that the EMP of ACU members’ shows similarity only in short-term movement but have no cointegration of EMP indices indicating the absence of long-term relationship. The absence of long-term cointegration of EMP for ACU members also indicates that ICU membership may not necessarily lead to similarity in exchange rate policies that facilitate the formation of a currency union. Creation of an ICU is not a sufficient condition for the formation of a currency union. The study also finds that the sample countries have faced persistent depreciation pressures in the period. The preferred tool for the management of EMP is direct intervention by sale and purchase of foreign currency. Interest rate changes are found to have the most significant effect on EMP. Research limitations/implications The EMP model limits itself only to the study of exchange rates, foreign reserves and interest rates. Exchange rate variation and policy responses there to are known to be driven by other factors such as speculation, political factors, autonomous capital flows and micro-level dynamics of exchange markets like order flows among others. The EMP model is a simplification of the market dynamics and does not look for associations on the account of these factors. The model is evaluated for only one ICU where member countries regulate exchange rates. The study of ICUs that comprises free float currencies and pegged currencies may yield different results. Practical implications Results indicate that the member of any ICU such as ACU cannot assume that its participation will serve as a foundation for creating higher forms of economic unions such as currency unions. In the absence of any long-term relationship between the EMP of countries, any attempt by these countries may cause the exchange rates to deviate further. This leads to the conclusion that the members of ACU should avoid any attempts to form currency unions or use a common currency for its settlement. Social implications Various countries that are considering the formation of currency union or the use of a common currency peg may like to examine its feasibility using EMP as a tool. Using EMP, they may be able to derive short-term and long-term strategies for pursuing their objectives. Originality/value There are few other studies that use EMP as an index for measuring the feasibility of formation of a currency union among countries that are the member of an ICU. While earlier studies apply EMP to a group of countries, none attempt to modify the index to reflect the EMP that is likely to affect central bank policy action. Few studies have attempted to use EMP to study the feasibility of formation of a currency union in South Asia based on exchange rate markets itself.

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Section: Introductionmentioning

confidence: 99%

Effect of International Clearing Union on exchange market pressure

Shekhawat

Kathuria

2018

JES

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Community-based economic romance and integration: assessing the feasibility of a currency union in South Asia

Verdie,

Salloum,

Jarrar

et al. 2024

JEC

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Purpose This purpose of this study aims to critically evaluate the feasibility of establishing a single currency area within the South Asian Association for Regional Cooperation (SAARC) by examining the economic integration of its member states. The analysis focuses on the extent to which the region meets the criteria of the optimum currency area (OCA) theory, particularly in terms of business cycle synchronization, labor mobility and capital flows. Design/methodology/approach Using a vector autoregression (VAR) model within the aggregate demand-aggregate supply framework, this research investigates the symmetry of supply and demand shocks across SAARC economies. The study analyzes the synchronization of business cycles and the mobility of labor and capital to determine the readiness of SAARC for a unified currency. Findings The results indicate significant asymmetries in business cycles among SAARC countries, with substantial disparities in economic responses to shocks. These findings suggest that the region lacks the necessary economic synchronization required for a successful single currency area. Limited labor and capital mobility further complicate the potential for economic integration within SAARC. Research limitations/implications The study is constrained by data inconsistencies and the limited range of economic indicators available for SAARC countries. Future research should expand the analysis to include a broader set of socioeconomic factors and more comprehensive data sets to better assess the region’s potential for monetary integration. Practical implications The study highlights the challenges of forming a currency union in South Asia due to economic disparities and limited mobility. However, gradual steps toward deeper regional integration, improved financial infrastructure and enhanced cross-border collaboration could foster long-term economic stability, growth and social cohesion in the SAARC region. Social implications The research highlights the potential social benefits of enhanced economic integration, such as increased community resilience and social cohesion, while also warning of the risks associated with premature monetary union in a region with significant economic disparities. Originality/value This study provides a detailed analysis linking the theoretical framework of the OCA to the practical realities of economic integration in South Asia. By focusing on the specific economic conditions of SAARC member states, the research offers valuable insights for policymakers considering regional monetary integration.

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How Many Currencies in SAARC Countries?: A Multivariate Structural VAR Approach

Cited by 2 publications

References 39 publications

Effect of International Clearing Union on exchange market pressure

Effect of International Clearing Union on exchange market pressure

Community-based economic romance and integration: assessing the feasibility of a currency union in South Asia

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