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Monetary Union in the GCC: A Preliminary Analysis

Published on: October 2008​
Genre: Economics/Finance​ Category: Research Report/ Research Paper/ White Paper​
States comprising the Gulf Cooperation Council have expressed an intent to form a monetary union in 2010. The planned union follows a policy of intraregional economic and financial integration and was formulated shortly after the creation of the GCC in 1981. This paper studies conditions under which a common currency should be adopted and whether the Gulf States meet these conditions. We employ annual GDP and inflation data for the period 1980-2006. The analysis reveals little business cycle synchronization among constituent states, despite highly correlated natural resource-driven exports; suggesting little economic rationale for a monetary union. Additionally, business cycles of Gulf States show little correlation with the business cycle of the United States; this in turn suggests that a monetary union whose common currency is pegged to the US dollar is likely to perpetuate current inflation volatility and may exacerbate it. The lack of synchronization signals that particular care in resolving economic asymmetries through agreed-upon structural adjustments and proper institutional design of a common central bank is necessary to achieve a viable common currency. Implementation of these changes may require Gulf states to revisit the timing of the currency union.

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