To be or not to be: An optimum currency area for South Asia?

This paper empirically investigates whether South Asian countries constitute an optimum currency area (OCA) by applying a structural vector auto-regression (SVAR) model to trace global, regional, and domestic shocks. Variance decomposition shows that domestic shocks dominate regional and global shocks, which contrasts with our findings for the European Union countries, used as a basis for comparison. We conclude that at the present time the South Asian region as a whole does not meet the prerequisite conditions of an OCA. The loss of an autonomous monetary instrument can outweigh the benefits of a common currency.