Assessing the Feasibility of Forming a Common Currency Area among D-8 Group Members: G-PPP Method

This paper examines the feasibility of forming a common currency area between D-8 group members by testing Purchasing Power Parity (PPP) and Generalized Purchasing Power Parity (G-PPP) theories over the period of 1993–2010. According to the results of Johansen Fisher Panel Cointegration method and Johansen Multivariate Cointegration method, the weak form of PPP theory and GPPP theory exist. It shows that these countries tend to be affected by similar shocks. Also the macroeconomic fundamentals that determine real exchange rates in D-8 group members are interrelated such that bilateral real exchange rates in these countries share common stochastic trends in the long run. Therefore, the minimum precondition to form a common currency area between D-8 group members exists. A good performance of a common currency area may increase the economic integration among mentioned countries and enhances their role in international decision-making. According to the results, Pakistan is the most proper member to start a common currency area. Turkey and Malaysia's economic structure are different from other members such that they are not proper countries to inter the common currency area with other members of D-8 group.