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Is the Announced Monetary Union in GCC Countries Feasible? A Multivariate Structural VAR Approach

Author

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  • Magda Kandil

    (International Monetary Fund)

  • Mohamed Trabelsi

Abstract

This paper tests the desirability and feasibility of establishing a monetary union in GCC countries using a multivariate structural Vector Autoregression Model (VAR) for the period 1980-2006. The paper builds on the earlier work, capitalizing on a methodology that captures supply and demand disturbances impinging on individual economies. Co-movement of shocks across countries is considered a crucial condition towards integration in a common currency area. Shocks are based on the estimation of a structural VAR model that comprises world real output, domestic output, real exchange rates and the price level. Based on correlations using demand and monetary shocks, the paper establishes the following results: (i) countries of the region are still far from the necessary conditions to ensure the success of joining a currency union. Nevertheless, for a subset of countries (Saudi Arabia, the United Arab Emirates and Qatar), conditions suggest higher potential to take the lead in endorsing and fostering a common currency zone, (ii) a higher degree of labor mobility, openness, and intra-regional mobility are still desired to accelerate regional integration and ensure a steady path towards the establishment of a currency union.

Suggested Citation

  • Magda Kandil & Mohamed Trabelsi, 2010. "Is the Announced Monetary Union in GCC Countries Feasible? A Multivariate Structural VAR Approach," Working Papers 522, Economic Research Forum, revised 05 Jan 2010.
  • Handle: RePEc:erg:wpaper:522
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    References listed on IDEAS

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    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    2. Sturm, Michael & Siegfried, Nikolaus, 2005. "Regional monetary integration in the member states of the Gulf Cooperation Council," Occasional Paper Series 31, European Central Bank.
    3. World Bank, 2009. "World Development Indicators 2009," World Bank Publications - Books, The World Bank Group, number 4367, December.
    4. Kwan, C. H., 1998. "The theory of optimum currency areas and the possibility of forming a yen bloc in Asia," Journal of Asian Economics, Elsevier, vol. 9(4), pages 555-580.
    5. Belkacem Laabas and Imed Limam, "undated". "Are GCC Countries Ready for Currency Union?," API-Working Paper Series 0203, Arab Planning Institute - Kuwait, Information Center.
    6. 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.
    7. Mr. Esteban Jadresic, 2002. "On a Common Currency for the GCC Countries," IMF Policy Discussion Papers 2002/012, International Monetary Fund.
    8. Aamer S. Abu‐Qarn & Suleiman Abu‐Bader, 2008. "On the Optimality of a GCC Monetary Union: Structural VAR, Common Trends, and Common Cycles Evidence," The World Economy, Wiley Blackwell, vol. 31(5), pages 612-630, May.
    9. Mr. Bassem M Kamar & Sami Ben Naceur, 2007. "GCC Monetary Union and the Degree of Macroeconomic Policy Coordination," IMF Working Papers 2007/249, International Monetary Fund.
    10. Pattanaik, Sitikantha, 2007. "How Closely the GCC Approximates an Optimum Currency Area?," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 22, pages 573-597.
    11. Michael Sturm & Nikolaus Siegfried, 2005. "Regional monetary integration in the member states of the Gulf Cooperation Council," Occasional Paper Series 31, European Central Bank.
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    Cited by:

    1. Abdulghaffar, Mahmood & Al-Ubaydli, Omar & Mahmood, Omar, 2014. "The Malfunctioning of the Gulf Cooperation Council Single Market: Features, Causes and Remedies," MPRA Paper 55413, University Library of Munich, Germany.
    2. Ashraf Nakibullah, 2017. "State of Shocks Synchronization among Members of the GCC," Research in World Economy, Research in World Economy, Sciedu Press, vol. 8(1), pages 15-23, June.
    3. Raimundo Soto & Bassem Kamar, 2015. "Monetary Policy and Economic Performance in Resource Dependent Economies," Documentos de Trabajo 462, Instituto de Economia. Pontificia Universidad Católica de Chile..
    4. Essahbi Essaadi, 2017. "The feasibility of currency union in Gulf Cooperation Council countries: A business cycle synchronisation view," The World Economy, Wiley Blackwell, vol. 40(10), pages 2153-2171, October.
    5. Shafighi, Najla & Gharleghi, Behrooz, 2016. "Feasibility of a currency union in East Asia using the five-variable structural vector autoregressive model," Economic Analysis and Policy, Elsevier, vol. 52(C), pages 45-54.
    6. Kim, Won Joong & Hammoudeh, Shawkat, 2013. "Impacts of global and domestic shocks on inflation and economic growth for actual and potential GCC member countries," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 298-317.
    7. Jongwanich, Juthathip & Wongcharoen, Petchtharin & Park, Donghyun, 2016. "Determinants of Consumer Price Inflation versus Producer Price Inflation in Asia," ADB Economics Working Paper Series 491, Asian Development Bank.
    8. repec:idn:jimfjn:v:4:y:2018:i:2:p:1-14 is not listed on IDEAS

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