Feasibility of a Monetary Union in Organization of Islamic Cooperation Countries: New Evidence From Competitiveness Differentials

The purpose of this study is to assess the feasibility of forming a common currency area in Organization of Islamic Cooperation countries (OIC). Based on the experience of Euro area in recent crises, this article emphasizes economic competitiveness differentials as a benchmark Optimum Currency Area criterion. In order to detect competitiveness differentials, this study relies on panel co integration techniques and uses the Pooled Mean Group method. Then the exchange rate misalignments in these countries are calculated and the co-moved pattern of misalignments and the sigma convergence of exchange rate misalignments are analyzed. The results indicate that most of Islamic regions experience diminishing competitiveness differentials and there is an obvious convergence in economic competitiveness levels in Islamic regions. In addition, the countries of Arab Economic Unity (AEU) are experiencing the lowest exchange rate misalignment; hence, it seems this is the most appropriate region satisfying the preliminaries of forming a common currency area.