Regional Integration, Monetary Cooperation: Evidence from Global VAR Models for the Member States of the Shanghai Cooperation Organization

Mohsen Khezri,Reza Ghazal,Muhamed Zulkhibri

doi:10.1177/0974910119874634

Abstract

Using quarterly data over the 1996 Q1 to 2015 Q5 period and a global vector regression (GVAR) model, this article empirically investigates the effect of supply, demand, and external shocks on member countries of the Shanghai Cooperation Organization (SCO) in order to examine if these countries have the ground to form a monetary union. The results suggest asymmetric response of central banks in these countries to domestic and external shocks and differentials in the impulse response of the macroeconomic variables to shocks: the response of the central banks of Kyrgyzstan and Russia to domestic shocks and of Belarus, Kyrgyzstan, and Russia to external shocks are short term and severe. Based on our results, forming a monitory union may not be feasible.

Highlights

The Shanghai Cooperation Organization (SCO) is an intergovernmental organization founded in Shanghai on June 15, 2001
Membership in a monetary union implies adhering to a national exchange rate and monetary policy, under which adjustment costs depend directly on the asymmetry of the shocks to an economy; if all member countries in a monetary union experience the same shocks, having a common policy incurs no costs
In this study, using a GVAR model, we examine the effects of macroeconomic shock in SCO member countries

Summary

Introduction

The Shanghai Cooperation Organization (SCO) is an intergovernmental organization founded in Shanghai on June 15, 2001. Among the reasons for forming a monetary union are to reduce the risk of exchange rate fluctuation and to reduce associated currency conversion costs. Eliminating these uncertainties will spur intra-regional trade and investment, as well as help boosting international trade advantage to all member states (Rose, 2000; Rose & Stanley, 2005). Eliminating the exchange rate instability is highly important, because it can affect both the trade and the investments. In this context, a monetary union helps enhance the credibility of monetary policy along with an independent central bank

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