A Common Currency Area for MENA Countries? A VAR Analysis of viability

Bacha, Obiyathulla I. (2008): A Common Currency Area for MENA Countries? A VAR Analysis of viability. Published in: The International Journal of Emerging Markets , Vol. 3, No. 2 (2008): pp. 197-215.

Abstract

This paper examines the feasibility of a Common Currency Area (CCA) among 10 (Middle East and North Africa) MENA Countries. The 10 sample countries constitute the six GCC Countries and the four Agadir nations.

Methodology Approach Macroeconomic data for the 34 year period 1970 to 2003 is used. Feasibility is examined by analyzing the symmetry of response of countries within each group to a common external shock. The impulse response functions (IRF) from a Vector Autoregression Model is used. The strength of lingkages within each economic bloc was examined using Pearson pairwise correlation and variance decomposition.

Findings Among GCC countries, the results show the existence of strong lingkages among the monetary variables, signifying strong monetary sector integration. Such integration however is lacking where the real sector is concerned. Despite the symmetry seen in the impulse response functions, variance decomposition showed the absence of any meaningful influence of countries on each other within the bloc. Amongst the Agadir nations, the results show no correlation in real output growth, some correlation among monetary variables but no symmetry whatsoever in response to external shocks. The variance decomposition too did not show mutual influence intra group.

Implications The lack of real sector integration will present a challenge to GCC’s desired goal of a CCA by 2010. The Agadir nations appear to be simply a loosely knit economic grouping with little integration of any kind. Thus, hopes of a CCA among Agadir nations is far too premature.

• Item Type: MPRA Paper
• Language: English
• Keywords: Feasibility of Common Currency Area; for MENA (Middle East and North African) countries
• Subjects: F - International Economics > F3 - International Finance > F30 - General; F - International Economics > F3 - International Finance > F33 - International Monetary Arrangements and Institutions; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration

References

Alesina, A., Barro, RJ and Tenreyo, S. (2002); Optimal Currency Areas. NBER Working Paper No. W9072, July, 2002.

Al-Jasser, M and Al Hamidy, A (2004); A Common Currency Area for the Gulf Region, in BIS Papers No. 17, 2004. Pp 116 – 120. http: www.bis.org/pub/bppdf/bispap17K.pdf

Bassem Kamar, (2004); De Facto Exchange Rate Policies in the MENA Region: Toward Deeper Cooperation. Paper presented at the 11th Annual Conference of The Economic Research Forum for the Arab Countries, Iran and Turkey. December 2004, Beirut, Lebanon.

Bergsten, C.F. and Park, YC. (2002); Toward Creating A Regional Monetary Arrangement in East Asia. ADB Institute Research Paper No. 50, Dec. 2002.

Enders, W. (2004); Applied Econometric Time Series, 2nd Edition. John Wiley & Sons Inc. 2004.

Faruqee, H. (2004); Euro Turns Five. Finance & Development, IMF Publications, June 2004.

Hallett, A.H and Piscitelli, L. (2002); Does One Size Fit All? A Currency Union with Assymetric Transmissions and a Stability Pact. International Review of Applied Economics, Vol. 16, No. 1, 2002

Hazel, Y.P.L. (2001); Optimum Currency Areas in East Asia. ASEAN Economic Bulletin Aug. 2004, pp. 206 – 217.

Jbili, A and Kramarenko, V (2003); Should MENA Countries Float or Peg? Finance & Development, IMF Publications, March 2003. Vol. 40, No. 1.

Kiss, E.F. (2004); Optimum Currency Area: Euro as a Practical Paradigm? Global Financial Markets – Issues and Strategies. Praeger Publishers, London (2004) pp. 205 – 225.

Kouparitsas, M.A. (2002); Is the EMU a viable common currency area? A Var Analysis of regional business cycles. Economic Perspectives, Federal Reserve Bank of Chicago 2002.

Nabli, M.K and Varoudakis, M.A.V (2004); How Does Exchange Rate Policy Affect Manufactured Exports in MENA Countries? Applied Economics, Oct. 2004, 36.19, p 2209.

Obiyathulla, B. (2005); A Common Currency Area For ASEAN? Issues and Feasibility. Paper presented at The 3rd International Finance Conference, March 2005, Hammamet, Tunisia. Accepted for publication in Applied Economics (forthcoming).

Park, YC (2002); Prospects for Financial Intergration and Exchange Rate Policy Cooperation in East Asia, ADB Institute Research Paper No. 48, Dec. 2002.

Schadler, S (2004); Charting A Course Toward Successful Euro Adoption. Finance & Development, IMF Publications, June 2004.