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

TL;DR

This paper assesses whether CAPADR countries are suitable for a single currency by analyzing demand and supply shocks, finding persistent asymmetries and divergence in business cycles that challenge monetary unification.

Contribution

It provides an empirical analysis of shock symmetry and business cycle synchronization among CAPADR countries, evaluating the feasibility of a common currency.

Findings

Asymmetric shocks dominate the region.

Business cycles have become more synchronized over time.

Countries face high costs due to cyclical divergence.

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.