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From dollar peg to basket peg:the experience of Kuwait in view of the GCC monetary unification

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  • Marzovilla, Olga
  • Mele, Marco
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    Abstract

    In May 2007, Kuwait unilaterally abandoned the dollar peg, adopted in 2003 as a first step towards the monetary integration of GCC countries, to return to the previous basket peg system. The decision was motivated by the need to limit the inflationary pressures resulting from prolonged depreciation of the dollar against major currencies. Given the importance the anti-inflationary objective had in this choice, the work focuses on the peculiarities of Kuwait’s economy, justifying and reviewing the price dynamics in the light of re-pegging to the basket, in the belief that its composition has been affected by inflationary trends. To this end, an econometric model "Auto-Regressive Moving Average" is proposed to define the weights of currencies in the basket and the estimate shows that Euro’s has increased during the period, consistent with the goals against inflation. This is a particularly important to the future of the planned monetary union of the GCC countries, given the renewed commitment of Kuwait to be part of it, despite the existence of different exchange rate systems in force in other countries.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21605.

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    Date of creation: 18 Mar 2010
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    Handle: RePEc:pra:mprapa:21605

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    Keywords: GCC countries; exchange rate regimes; basket peg; dollar peg; inflation;

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    1. Serven, Luis & Frankel, Jeffrey & Fajnzylber, Eduardo & Schmukler, Sergio, 2000. "Verifying exchange rate regimes," Policy Research Working Paper Series 2397, The World Bank.
    2. Magda E. Kandil & Hanan Morsy, 2009. "Determinants of Inflation in GCC," IMF Working Papers 09/82, International Monetary Fund.
    3. Wei, S.J. & Frankel, J.A., 1992. "Yen Bloc or Dollar Bloc: Exchange Rate Policies of the East Asian Economies," Papers 92-08, University of Birmingham - International Financial Group.
    4. Hesham Alogeel & Maher Hasan, 2008. "Understanding the Inflationary Process in the GCC Region," IMF Working Papers 08/193, International Monetary Fund.
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