South Asian Monetary Integration in Light of the Optimum Currency Area Criterion of Patterns of Shocks†

Abstract

This article discusses South Asian monetary integration in light of the Optimum Currency Area criterion of patterns of shocks. Patterns of shocks indicate the cost resulting from adjustment to balance of payments disequilibrium due to pursuing a fixed or a flexible exchange rate strategy. Empirical results suggest that SAARC is not an optimum currency area. In other words, there will be significant costs of immediately implementing the extreme form of monetary integration, that is, monetary union such as that in Europe. Thus, SAARC should not pursue a single currency at this time.