This thesis is intended to consider whether the South American members of the trade bloc, the Pacific Alliance, namely Chile, Colombia, Peru, form an optimum currency area (OCA). An in-depth review into the progression of OCA theory is done to formulate a proper econometric analysis. An empirical investigation is conducted by using main macroeconomic indicators from the time period 2001 to the third quarter of 2014 to examine if the aforementioned countries are within the definition of an OCA. An ordinary least squares regression is done on three major economic indicators to test the causes of the deviation from one another. Evidence suggests the group is currently not an OCA and extensive integration efforts would be needed before the group is within the bounds of forming an OCA.

A gravity model is used to evaluate the effects of currency union on intra-regional trade of ECOWAS (Economic Community of West African States) member states. The panel data used includes bilateral observations for fourteen years spanning 1994 through 2006 for 16 countries. Controlling for determinants and deterrents of trade, I find the presence of a currency union three times as likely to increase intra-regional trade between ECOWAS member countries. In addition, I find that the effect on trade creation has been steadily falling since 1994.

The introduction of the single currency (Euro) in Europe has been referred to as the ‘world’s largest economic experiment’ and has led to major research on the effects of the adoption of a common currency on economic activity with considerable emphasis on its effect on trade flows at the macroeconomic level. However, the investigation of the euro effect on individual sectors has received very little attention and this provides the motivation for the research. The main contribution of this thesis is to the sectoral analysis of the single currency’s effect on bi-lateral trade flows, specifically the effects on the transport equipment manufacturing sector. In order to achieve this, a comparison of the different estimation methods applied in the gravity model literature will be employed to investigate this effect and to identify the factors affecting trade in this sector. This study uses a panel data set which comprises the most recent information on bilateral trade for the EU15 countries from 1990 to 2008. This research aims to build on the results obtained in previous studies by employing a more refined empirical methodology and associated tests. The purpose of the tests is to ensure that the euro’s effect on trade is isolated from the other pro- trade policies of the European integration processes, particularly the introduction of the Single Market. The desirable feature of this approach is that, while other studies limit their attention to a particular issue (zero trade flow, time trend, sectoral analysis, cross-correlation, etc.), very few, if any, apply a selection of techniques. Overall, the results demonstrate that the single currency’s effect on trade in this sector is limited with only the fixed effects formulation with year dummy variables showing a significant positive effect of the euro. An obvious policy implication for countries looking to adopt a single currency is that they should be cautious regarding the potential for growth in intra-bloc trade in a particular sector, although they will benefit from the on-going process of integration.

Yes / The global economy has experienced considerable turbulence since 2007. The financial crisis has been viewed as the trigger for a prolonged period of economic decline. This decline remains an issue for all member states of the European Union, the eurozone and beyond. We argue genesis of this crisis lies in the integration negotiations of 1991, ratified in 1992. These produced a flawed economic model within the eurozone. Given the seeds of decay were planted at origin; we argue the solution can be found through a reconstructed eurozone via looser integration, where countries less equipped to deal with the realities of closer integration will be economically independent.

Yes / This paper examines real effective exchange rate (REER) responses to shocks in exchange rate determinants for the West African Monetary Zone (WAMZ) over the period 1980–2015. The analysis is based on a country-by-country VECM, and oil price, supply and demand shocks are identified using long run restrictions in a structural VAR model. We report significant differences in the response of REER to real oil price, productivity (supply) and demand preference shocks across these economies. In addition the relative contribution of these shocks to REER movements in the short and long run appears to be different across economies. Our findings suggest that the WAMZ countries are structurally different, and asymmetric shocks with inadequate adjustment mechanisms imply that a monetary union would be costly.

Many regions of the world would like to replicate the financial and monetary integration of the European Monetary Union (EMU). Member countries of the Association of Southeast Asian Nations (ASEAN) have shown an interest in such an arrangement. ASEAN is a political, cultural, and economic association that includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. Many of these nations are experiencing rapid economic development while others are still relatively poor and under developed. As such, they appear to be an unlikely group for currency unification. Older studies suggest that multiple currency union groupings may be possible in the short run that could be unified into a whole at an unspecified time in the future. The issue has been studied for some time and appeared defunct with the onset of the Asian Financial Crisis. More than a decade has passed and another more global financial crisis has ensued leaving many Asian countries in better shape than their highly developed trading partners in the west. This leads to the need for further examination of the possible unification of some or all ASEAN members into a Regional Currency Arrangement. This dissertation evaluates the readiness of the ASEAN nations for monetary union using data from the post Asian Financial Crisis period. Results of a formal G-PPP test show the area is an optimum currency area. Analysis of other criteria shows incredible diversity across the countries in the region that would make unification a challenge. Coordination of monetary policy would be most difficult given the variety of inflation rates and differences in depth of financial system development as explored in chapter 2. Trade has increased in the region leading to better linkages among economies but the data shows that reaching full integration of all countries by the 2020 deadline without disruptions in some economies may still be difficult.

The theory of optimum currency areas states that the more two countries trade with each other, the better candidates they are for a currency union. In terms of the endogeneity argument, convergence follows from joining a currency union and the integration process itself turns the countries into optimal currency areas. The potential increase in trade is regarded as one of the most important benefits of a currency union. Indirect evidence from studies on the effect of exchange rate volatility on trade does not support this claim. Rose argues that the common currency effect on trade is separate from the effect of the elimination of exchange rate variability and finds a large positive effect of a currency union on trade. Although his methodology has met with criticism, most studies find a positive estimate. A meta-analysis of the studies confirms that a common currency has a statistically and economically significant trade-creating effect. / Economics / M.Com. (Economics)

The purpose of the dissertation is to establish a framework with which to assess the prospective gains from regional monetary integration among five neighboring countries in East Africa: Burundi, Kenya, Rwanda, Tanzania, and Uganda. The neo-classical theory assumes that economic and monetary union would stimulate additional growth in such a union as a whole, with the trickle-down effects of overall development, and would enhance factor mobility, solving the problem of regional disparity automatically. Past experiences of African regionalism have shown that countries that participated in a monetary union were able to pursue credible monetary policies. This economic performance has been credited to their monetary policy discipline. Since countries in East Africa are small both in terms of their individual populations and the respective sizes of their economies, the study concludes that regional integration is a useful way of increasing their economic clout and bargaining power on the global scene. / Economics / Thesis (M. Comm.)

This dissertation consists of three independent essays addressing several key issues related to the empirical application of optimum currency area. The first essay explores the features of the CFA franc zone by operationalizing Robert Mundell’s (1952) criteria for an optimum currency area. A vector autoregression method is used in modeling national outputs as determined by global, regional and country-specific shocks. It finds that domestic outputs of the CFA franc zone countries are strongly influenced by country-specific shocks. These results suggest that the CFA franc zone countries are structurally different from each other and the monetary union may have been a costly arrangement for the member countries. The second essay focuses on the Eastern Caribbean Currency Union (ECCU). A 2-vairable vector autoregressive model is estimated to investigate the extent of symmetric shocks in the small open economies of the ECCU. The paper finds that domestic outputs of the ECCU countries are strongly influenced by regional shocks. These results indicate that the ECCU countries are structurally similar to each other and exchange arrangements appear to have well served the region and the group of countries is more likely to be an optimum currency area. The third essay explores the possibility of a currency union in East Asia. In this essay, the extent of global and regional integration in East Asia is investigated using the stock price index as a measure of economic performance. A similar VAR model is employed to separate the underlying shocks into global, regional and country-specific shocks. The estimation results show that country-specific shocks play a dominant role in East Asia although their role appears to have declined over time, especially after the 1997 financial crisis. Global and regional shocks are responsible for small but increasing shares of stock price fluctuations in most countries. The results indicate that, despite years of liberalization and regional integration, economies in East Asia remain dissimilar and are subject to asymmetric shocks and it might be costly for East Asian countries to abandon monetary policy independence to form a monetary union and that a more flexible exchange rate regime might be desirable.

Diese Dissertation analysiert reale Wechselkursdynamiken und die Rolle von Fiskalpolitik in einer Währungsunion, die sich aus zwei Regionen zusammensetzt. Drei Forschungsfragen werden adressiert: Welche politischen Regime führen in Abwesenheit von Handel zu determinierten Gleichgewichten? Welche Rolle spielt Arbeitsmobilität über Produktionssektoren hinweg innerhalb einer Volkswirtschaft für die Dynamik des realen Wechselkurses? Und sollte nationale Fiskalpolitik auf diese Änderungen des realen Wechselkurses, d.h. auf Inflationsdifferenziale, reagieren, um den inländischen Wohlstand zu erhöhen? Das erste Essay stellt fest, dass bei autarken Mitgliedsländern eine Geldpolitik nach Taylor-Prinzip nicht ausreicht, um ein Gleichgewicht zu determinieren, wenn sie nicht mit einer "aktiven" Fiskalpolitik gekoppelt ist. Das Modell zeigt, dass fiskalische Schocks aus der Volkswirtschaft mit einer aktiven Fiskalpolitik die Inlandsinflation beeinflussen, sich aber auch auf die Volkswirtschaft auswirken, deren fiskalische Haltung passiv ist. Das zweite Essay zeigt, dass die Annahme von perfekter Arbeitsmobilität über Produktionssektoren hinweg die Fähigkeit des Modells erheblich beeinträchtigt, ausgiebige Dynamiken des realen Wechselkurses nach sektorspezifischen Schocks zu generieren. In einer empirischen Anwendung zerlege ich die Treiber der spanischen realen Wechselkursvariabilität und zeige, dass die Schätzung der Arbeitsmobilität die Modellanpassung an die Daten erheblich verbessert. Der dritte Aufsatz erwägt reale Wechselkursschwankungen als Zielvariable für nationale Fiskalpolitiken in einer Währungsunion. Eine Wohlfahrtsanalyse, die Konsumäquivalente berechnet, quantifiziert die Vorteile von Steuerregeln, die auf das inländische Inflationsdifferenzial reagieren. Sie findet großen Spielraum für wohlfahrtsfördernde, fiskalische Interventionen im Rahmen von budgetneutralen Regeln für Konsum- und Lohnertragssteuern. / This dissertation analyses real exchange rate dynamics and the role of fiscal policy within the setting of a monetary union consisting of two regions. It seeks to address three research questions: What are the policy regimes that yield determinate equilibria in the absence of trade? What is the role of labour mobility across production sectors within an economy in real exchange rate dynamics? And should a national fiscal authority respond to these changes in the real exchange rate, i.e. the domestic inflation differential, to improve domestic welfare? The first essay finds that with autarkic member countries, a monetary authority following the Taylor principle is insufficient to render an equilibrium determinate if it is not coupled with exactly one `active' fiscal policy. The model shows that fiscal shocks originating in the economy with an active fiscal stance affect domestic inflation but also spill over into the economy whose fiscal policy stance is passive. The second essay shows that assuming perfect labour mobility across production sectors significantly hampers the model's ability to generate rich real exchange rate dynamics following sector-specific shocks. In an empirical application, I decompose the drivers of Spanish real exchange rate variability and show that estimating the degree of labour mobility considerably improves the model's fit to the data. The third essay considers real exchange rate variability as a fiscal target for national fiscal authorities in a monetary union. A welfare analysis that calculates consumption equivalents quantifies the benefits of fiscal rules that are responsive to the domestic inflation differential. It finds a large scope for welfare-enhancing fiscal intervention in the set of budget-neutral rules which rely on consumption and labour income taxes.