Is a monetary union feasible for Islamic countries? Examination of D-8 countries in the framework of the optimum currency area

A monetary union is an agreement between two or more states to create a single monetary area. Although the concept of monetary union has been discussed for a long time, the establishment of the European Monetary Union has increased the interest in the monetary union. In our study, it is tested whether D-8 countries are the optimum currency area. For this, the exchange rate, inflation, interest, and foreign trade variables were analyzed using quarterly data between 2000 and 2020. Whether the economic shocks are similar to each other or not has been examined through the Vector error correction model (VECM), impulse-response function and variance decomposition analysis. It has been determined that Inflation, Interest and Trade in Malaysia and Nigeria are the Granger cause of the Dollar. It has been observed that there is a long-term causality relationship from Dollar and Interest to Inflation in Turkey. When we examine the impulse-response function and the results of variance decomposition together; It has been determined that all D-8 countries are not suitable in terms of the optimum currency area, but Turkey, Nigeria, Egypt and Malaysia, which can be considered as a sub-group in D-8, are similar to the shocks occurring in their related variables compared to other D-8 countries. Although these countries are not geographically close to each other, the monetary union will be able to fulfill the requirements of the optimum money field in terms of the symmetry of shocks.