The Single Currency for Islamic Nations: Do Heterogeneities Matter?

Abstract

The purpose of this study is to assess the readiness of 44 OIC member countries to form a currency union and to test whether the Optimum Currency Area (OCA) criteria remain relevant to a large region like the OIC. Large geographic size is subject to socio-economic and geographic disparities. This study employs the OCA-index to estimate the degree of readiness of the OIC to form a currency union. Five selected criteria –business cycle synchronization, trade openness, inflation similarity, the size of the economy, and distance – were employed to determine the OCA using Ordinary Least Squares regression. The findings of this study estimate that 63 percent of pairs of countries in the OIC are ready to form a currency union. The selected OCA’s criteria present the best-fit variable in explaining the OCA for the OIC. This paper verifies that economic and geographic heterogeneities are not the main obstacle to forming a currency union. This study provides an important contribution to the theory of OCA primarily in clarifying the application of the OCA conditions in a large observation like the OIC, which comprises many countries and many blocs.

Indonesia’s Monetary Integration with OIC Member Countries: New Evidence

“…Only 20 percent of country pairs are nominated in the little integration. This finding clearly proves an empirical gap compared to previous studies (Bayoumi & Mauro 2001;Ng 2002;Huang & Guo 2006;Achsani & Partisiwi 2010;Lee 2011;Agustiar 2018). Indonesia's monetary integration has so far been considered somewhat weak against its neighbouring countries, but this study found it to be strongly integrated with more than half of the OIC countries.…”

“…Two regional economic blocs in Africa -Central Africa and West Africa -have set the CFA Franc as a benchmark since 1945 (Uzonwanne 2012). In the context of Indonesia, previous studies reported that the synchronization of the Indonesian Rupiah (IDR) with other countries is relatively weak (Bayoumi & Mauro 2001;Ng 2002;Huang & Guo 2006;Achsani & Partisiwi 2010;Lee 2011;Agustiar 2018). The weakness of Indonesia's integration with its neighbouring countries is primarily due to the instability of prices, currency asymmetry, low trade openness, and a business cycle that is non-synchronous with the global economy.…”

Closer together or further apart? Club convergence in the Organization of Islamic Cooperation (OIC) countries

“…15. Surprisingly in a different context, Agustiar (2018) found that most of the OIC countries are ready to form a currency union together as the socio-economic gaps across member countries tend to decline over time.…”