A Search for an Optimum Currency Area Partners for Pakistan

The Indian government has on several occasions advocated the idea that a common currency area be formed in the SAARC region. The response from other member countries has been somewhat lukewarm. They are unconvinced that the benefit of currency union establishment will outweigh the cost emanating from the abandonment of national monetary sovereignty. This paper seeks to empirically investigate the feasibility of a common currency area for Pakistan with each one of the following countries; India, Bangladesh, Saudi Arabia and Sri Lanka. This empirical investigation involves estimation of the co-variation of the bilateral real exchange rates using the Japanese Yen and the US dollar as base currencies. Section 2 begins with an eclectic overview of the Optimum Currency Area (OCA) literature. Section 3 presents the estimation methodology, Section 4 discusses the findings and Section 5 concludes the analysis.