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Monetary Union Among Arab Gulf Cooperation Council (AGCC) Countries: Does the symmetry of shocks extend to the non-oil sector?

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  • Louis, Rosmy
  • Balli, Faruk
  • Osman, Mohammad

Abstract

AGCC countries' output is heavily dichotomized into oil and non-oil. The oil shocks have similar effects on all member countries but little is known about their responses to non-oil shocks. This paper sets out to determine whether (1) aggregate demand (AD) and non-oil supply shocks (AS) are symmetrical across these countries to justify their suitability for monetary union; and (2) whether there is any commonality of shocks with the United States and the three major European countries, namely France, Germany, and Italy, which can warrant the choice of either the US dollar or the Euro as the anchor for the expected common currency of the bloc. We use bivariate structural vector autoregression models identified with long-run restrictions a la Blanchard and Quah (1989) to extract the shocks. Our results show that (a) AD shocks are unequivocally symmetrical but non-oil AS shocks are weakly symmetrical across AGCC countries thereby giving a green light for monetary union; (b) neither AD nor AS shocks are symmetrical between AGCC countries and the selected European countries; (c) AGCC's AD shocks are symmetrical with the US but non-oil AS shock are not. We therefore surmise that the US dollar is a far better candidate for the new currency than the Euro since US monetary policy can at least help smooth demand shocks in AGCC countries. Our results hold even when we consider the AGCC countries as a bloc. This paper makes a valuable contribution to AGCC decision makers who have been wrestling with the dilemma of whether to revalue or to depeg their actual currencies.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11611.

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Date of creation: 04 Jul 2008
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Handle: RePEc:pra:mprapa:11611

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Keywords: AGCC; monetary union; shocks symmetry; currency anchor;

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References

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  1. Giordani, Paolo, 2000. "An alternative explanation of the price puzzle," Working Paper Series in Economics and Finance 414, Stockholm School of Economics, revised 06 Dec 2000.
  2. Suleiman Abu-Bader & Aamer Abu-Qarn, 2006. "On the Optimality of a GCC Monetary Union: Structural VAR, Common Trends and Common Cycles Evidence," Working Papers 225, Ben-Gurion University of the Negev, Department of Economics.
  3. Hanson, Michael S., 2004. "The "price puzzle" reconsidered," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1385-1413, October.
  4. 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.
  5. Behrouz Guerami & S. Nuri Erbas & George T. Abed, 2003. "The GCC Monetary Union," IMF Working Papers 03/66, International Monetary Fund.
  6. Ugo Fasano-Filho & Andrea Schaechter, 2003. "Monetary Union Among Member Countries of the Gulf Cooperation Council," IMF Occasional Papers 223, International Monetary Fund.
  7. Shafik Hebous, 2006. "On the Monetary Union of the Gulf States," Kiel Advanced Studies Working Papers, Kiel Institute for the World Economy 431, Kiel Institute for the World Economy.
  8. Bayoumi, T. & Eichengreen, B., 1994. "One Money or Many? Analysing the Prospects for Monetary Unification in Various Parts of the World," Princeton Studies in International Economics 76, International Economics Section, Departement of Economics Princeton University,.
  9. 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.
  10. Michael Sturm & Nikolaus Siegfried, 2005. "Regional monetary integration in the member states of the Gulf Cooperation Council," Occasional Paper Series 31, European Central Bank.
  11. 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.
  12. Belkacem Laabas and Imed Limam, . "Are GCC Countries Ready for Currency Union?," API-Working Paper Series 0203, Arab Planning Institute - Kuwait, Information Center.
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Cited by:
  1. 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, Institute for Economic Forecasting, vol. 0(3), pages 71-82, September.

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