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ABSTRACT
This paper examines whether or not the South Asian Association Regional Cooperation (SAARC), can introduce a single currency across the region. A four-variable structural vector autoregressive (SVAR) model is used to identify the underlying shocks and to examine the correlation in shocks for a specified sample period of 1974-2010. The results show asymmetric correlations among domestic shocks, which do not suggest forming a common currency area across the region. The paper also finds lower factor mobility; lower degree of intra-regional trades, and lack of political cooperation, suggesting the SAARC countries are not yet ready to introduce a common currency.
JEL Classifications: E52, E58, E59, F15.
Keywords: SAARC, common currency, SVAR.
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INTRODUCTION
The South Asian Association of Regional Cooperation (SAARC) is a regional group of countries in South Asia, established in 1985. The seven founding member countries are Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. Afghanistan joined SAARC in 2007. The SAARC member countries comprise almost 5.13 million square kilometers, which is almost 4% of the total world surface area. About 1,567.72 million people, which is 23% of the world population live in the SAARC countries. The objectives of SAARC include promotion of socioeconomic development within the South Asian countries. One of the objectives of the formation of SAARC was to develop a cooperative environment among the member countries. For instance, the Committee on Economic Corporation (CEC) formulates and monitors the programs to facilitate the intra-regional cooperation among the member countries, and the preferential trading area, SAARC Preferential Trading Arrangement (SAPTA) signed in 1993 promotes trade. This agreement was the crucial step towards trade liberalization and economic co-operation through the reduction of tariffs among the member countries.1 Since 2006, the SAARC member countries also have a free trade area, South Asian Free Trade Area (SAFTA), whereby the member countries are committed to a ten year plan to taking out tariffs.2 SAFTA would be fully implemented by the end of 2016. The ultimate objective of SAFTA is to form an economic union among these countries. One of the crucial objectives is to move towards more economic integration and ultimately towards a common currency in South Asia. This was emphasized by the Prime Minister of India, Mr. Atal Bihari...