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Establishing Conversion Values for New Currency Unions

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  • Bassem Kamar
  • Jean-Etienne Carlotti
  • Russell C. Krueger

Abstract

A key issue in creating a new currency union is setting the rates to convert national currencies into the new union currency. Planned unions in the Gulf region and Africa are seeking methods to set the conversion rates when their new currencies are created. We propose a forward-looking econometric methodology to determine conversion rates by calculating the degree of misalignment in the real exchange rate, and apply it to the GCC currency union. For each GCC currency, we identify the year at which the economy is the closest to its internal and external equilibrium, and then estimate the degree of misalignment in the bilateral real exchange rate vis-Ã -vis the U.S. dollar based on WEO forecasts until 2013. Application of the methodology to other regions is also considered.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/184.

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Length: 58
Date of creation: 01 Aug 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/184

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Keywords: Economic Community of West African States; Euro; Convertibility; Convertible currencies; Economic models; Exchange rate determination; Exchange rates; Real effective exchange rates; exchange rate; reer; real exchange rate; currency unions; real effective exchange rate; real exchange rates; capital flows; exchange rate regime; effective exchange rate; equilibrium exchange rate; oil exports; nominal exchange rate; exchange rate adjustment; exchange rate misalignment; exchange rate mechanism; fixed exchange rate; basket of currencies; nominal exchange rates; fixed exchange rate regime; nominal effective exchange rate; bilateral exchange rates; exchange rate appreciation; exporting countries; current account balance; real exchange rate appreciation; real exchange rate misalignment; oil exporting countries; exchange rate stability; bilateral real exchange rate; exchange rate misalignments; export performance; total exports; exchange rate pressures; exchange rate index; exchange rate policies; price of exports; real exchange rate misalignments; export trade; trade liberalization; exchange rate changes; prevailing exchange rates; oil exporting; economic indicators; exchange rate regimes; exchange rate movements; exchange markets; capital flight; fixed exchange rates; exchange rate target; import prices; exchange rate volatility; institution building; exchange rate dynamics; exporters; exchange rate needs; exports of oil; currency values; exchange rate management; exchange rate risk; real exchange rate movements; exchange rate indices; relative exchange rates; real exchange rate changes; exchange rate adjustments; exchange rate fluctuations; exchange rate peg; effective exchange rates; fixed nominal exchange rates; commodity exporting countries; oil-exporting countries; exchange policy; foreign exchange; stable exchange rate; dollar exchange rate; dollarization; exchange rate variation; oil exporters; exchange rate policy; fluctuation margins;

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Cited by:
  1. Dupuy, Philippe & Carlotti, Jean-Etienne, 2010. "The Optimal Path of the Chinese Renminbi," MPRA Paper 26107, University Library of Munich, Germany.
  2. Abdelghani, Echchabi & Osman, Sayid & Isares, Mahamad & Khalid, Sorhiran & Zulhilmi, Zulkifli, 2011. "The implementation of Gulf Dinar among the GCC member countries and its possible impacts," MPRA Paper 28245, University Library of Munich, Germany.

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