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On the Optimality of a GCC Monetary Union: Structural VAR, Common Trends and Common Cycles Evidence

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Author Info

  • Suleiman Abu-Bader

    ()
    (Department of Economics, Ben-Gurion University of the Negev)

  • Aamer Abu-Qarn

    ()
    (Department of Economics, Ben-Gurion University of the Negev)

Abstract

This paper examines the suitability of the proposed monetary union among the members of the Gulf Cooperation Council (GCC). To do so, we identify the underlying structural shocks that these economies are subject to and assess the extent to which the shocks are symmetric. Additionally, we test for common trends and common business cycles among the GCC economies. We find that while the transitory demand shocks areare typically symmetric, the permanent supply shocks are asymmetric. Furthermore, we do not find synchronous long-run and short-rum movements in output. Despite the progress that has been made in terms of integration, our findings indicate thet the conditions for forming a GCC monetary union have not as yet been met.

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File URL: http://www.econ.bgu.ac.il/papers/225.pdf
File Function: First version, 2006
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Bibliographic Info

Paper provided by Ben-Gurion University of the Negev, Department of Economics in its series Working Papers with number 225.

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Length: 32 pages
Date of creation: Sep 2006
Date of revision:
Publication status: Published in The World Economy as: Abu-Qarn, A. S. and Abu-Bader, S. (2008) “On the Optimality of a GCC Monetary Union: Structural VAR, Common Trends, and Common Cycles Evidence,” The World Economy, 31(5), pages 612-630.
Handle: RePEc:bgu:wpaper:225

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Keywords: Gulf Cooperation Council; GCC; optimal monetary union; cointegration; common cycles; structural VAR;

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References

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  1. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  2. Zaidi, Iqbal, 1990. "Monetary coordination among the gulf cooperation council countries," World Development, Elsevier, vol. 18(5), pages 759-768, May.
  3. Michael Sturm & Nikolaus Siegfried, 2005. "Regional monetary integration in the member states of the Gulf Cooperation Council," Occasional Paper Series 31, European Central Bank.
  4. Vahid, F & Engle, Robert F, 1993. "Common Trends and Common Cycles," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(4), pages 341-60, Oct.-Dec..
  5. Horvath, Julius & Ratfai, Attila, 2004. "Supply and demand shocks in accession countries to the Economic and Monetary Union," Journal of Comparative Economics, Elsevier, vol. 32(2), pages 202-211, June.
  6. Belkacem Laabas and Imed Limam, . "Are GCC Countries Ready for Currency Union?," API-Working Paper Series 0203, Arab Planning Institute - Kuwait, Information Center.
  7. Bayoumi, Tamim & Eichengreen, Barry, 1994. "Monetary and exchange rate arrangements for NAFTA," Journal of Development Economics, Elsevier, vol. 43(1), pages 125-165, February.
  8. Behrouz Guerami & S. Nuri Erbas & George T. Abed, 2003. "The GCC Monetary Union," IMF Working Papers 03/66, International Monetary Fund.
  9. Ugo Fasano-Filho & Andrea Schaechter, 2003. "Monetary Union Among Member Countries of the Gulf Cooperation Council," IMF Occasional Papers 223, International Monetary Fund.
  10. Humayon A. Dar & John R. Presley, 2001. "The Gulf Co-operation Council: A Slow Path to Integration?," The World Economy, Wiley Blackwell, vol. 24(9), pages 1161-1178, 09.
  11. Arie Arnon & Avia Spivak, 1996. "Monetary integration between the Israeli, Jordanian and Palestinian economies," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 132(2), pages 259-277, September.
  12. Buigut, Steven K. & Valev, Neven T., 2005. "Is the proposed East African Monetary Union an optimal currency area? a structural vector autoregression analysis," World Development, Elsevier, vol. 33(12), pages 2119-2133, December.
  13. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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Cited by:
  1. Stefan Eichler & Alexander Karmann, 2011. "Optimum Currency Areas in Emerging Market Regions: Evidence Based on the Symmetry of Economic Shocks," Open Economies Review, Springer, vol. 22(5), pages 935-954, November.
  2. Rosmy Jean Louis & Faruk Balli & Mohamed Osman, 2012. "On the choice of an anchor for the GCC currency: does the symmetry of shocks extend to both the oil and the non-oil sectors?," International Economics and Economic Policy, Springer, vol. 9(1), pages 83-110, March.
  3. Omotor, Douglason G. & Niringiye, Aggrey, 2011. "Optimum Currency Area and Shock Asymmetry: A Dynamic Analysis of the West African Monetary Zone (WAMZ)," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 71-82, September.
  4. Weshah Razzak, . "On the GCC Currency Union," API-Working Paper Series 0910, Arab Planning Institute - Kuwait, Information Center.
  5. Louis, Rosmy & Balli, Faruk & Osman, Mohammad, 2008. "Monetary Union Among Arab Gulf Cooperation Council (AGCC) Countries: Does the symmetry of shocks extend to the non-oil sector?," MPRA Paper 11611, University Library of Munich, Germany.
  6. Jean Louis, Rosmy & Balli, Faruk & Osman, Mohammad, 2009. "Is the US dollar a suitable anchor for the newly proposed GCC currency?," MPRA Paper 34003, University Library of Munich, Germany, revised 2010.
  7. Rosmy Jean Louis & Faruk Balli & Mohamed Osman, 2012. "On the feasibility of monetary union among Gulf Cooperation Council (GCC) countries: does the symmetry of shocks extend to the non-oil sector?," Journal of Economics and Finance, Springer, vol. 36(2), pages 319-334, April.
  8. Etienne Farvaque & Norimichi Matsueda, 2010. "On the Sustainability of a Monetary Union under External Shocks: a Theoretical Result and Its Application to the Gulf Countries," Discussion Paper Series 66, School of Economics, Kwansei Gakuin University, revised Dec 2010.
  9. Adom, Assandé Désiré & Sharma, Subhash C. & Morshed, A.K.M. Mahbub, 2010. "Economic integration in Africa," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(3), pages 245-253, August.
  10. Willem Buiter, 2008. "Economic, Political, and Institutional Prerequisites for Monetary Union Among the Members of the Gulf Cooperation Council," Open Economies Review, Springer, vol. 19(5), pages 579-612, November.
  11. Ahmed AlKholifey & Ali Alreshan, 2010. "GCC monetary union," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Proceedings of the SARB/IFC seminar on "Economic and financial convergence en route to regional economic integration: experience, prospects and statis, volume 32, pages 17-51 Bank for International Settlements.

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