Shock Symmetry and Business Cycle Synchronization: Is Monetary Unification Feasible among CAPADR Countries?

Jafet Baca

Papers from arXiv.org

Abstract: In light of the ongoing integration efforts, the question of whether CAPADR economies may benefit from a single currency arises naturally. This paper examines the feasibility of an Optimum Currency Area (OCA) within seven CAPADR countries. We estimate SVAR models to retrieve demand and supply shocks between 2009:01 - 2020:01 and determine their extent of symmetry. We then go on to compute two regional indicators of dispersion and the cost of inclusion into a hypothetical OCA for each country. Our results indicate that asymmetric shocks tend to prevail. In addition, the dispersion indexes show that business cycles have become more synchronous over time. However, CAPADR countries are still sources of cyclical divergence, so that they would incur significant costs in terms of cycle correlation whenever they pursue currency unification. We conclude that the region does not meet the required symmetry and synchronicity for an OCA to be appropiate.

Date: 2021-12, Revised 2022-01
New Economics Papers: this item is included in nep-cwa, nep-mac and nep-mon
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