Investigating the possibility of forming a common monetary union between Member and Observer states of the Shanghai Cooperation Organization using Global Vector Auto Regression model GVAR

The creation of a common monetary union could bring significant economic gains by reducing transaction costs, eliminating exchange rate risks, and consequently increasing trade and capital. In this study, in order to investigate the possibility of forming a common monetary union between Member and Observer states of the Shanghai Cooperation Organization, the effect of external and internal shocks on the supply and demand side on the macroeconomic variables of these countries, using the GVAR Global Vector Regression Model and seasonal data for years 1996 to 2015 is investigated. The results of the study of the effects of external shocks indicate that, apart from Kyrgyzstan, the behavior of other countries is relatively symmetrical to external shocks. The results represent an equally symmetric reaction of the countries to domestic monetary policies, so that only in the foreign sector of the economy we have seen asymmetries about the effect of monetary shocks. The results of the study of the effects of shocks on the supply sector show the more asymmetric reactions of the variables of the model in comparison with external shocks; so that the greatest asymmetry can be seen in the impact of supply shocks on the interest rate of countries; the results outlines the different policy structures of the central banks of the countries under consideration. On the other hand, in relation to the economy of Iran and Kyrgyzstan, we see a different reaction of the foreign sector variables in comparison with other countries, so that the above results indicate differences in foreign exchange regimes or other foreign sector structures of these countries compared to other countries. The final results indicate that there is a greater symmetry of the impact of the shocks under consideration in the countries of China, India and Russia relative to Iran and Kyrgyzstan, so that it is possible to form a monetary union between these countries.