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Is the US dollar a suitable anchor for the newly proposed GCC currency?

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

Abstract

Responses of inflation and non-oil output growth from the Gulf Cooperation Council (GCC) countries to monetary policy shocks from the United States (US) were estimated to determine whether there is evidence to support the US Dollar as the anchor for the proposed unified currency. A structural vector autoregression identified with short-run restrictions was employed for each country with Fed funds rate as the US monetary policy instrument, non-oil output growth, and inflation. The main results suggest that for inflation, the GCC countries show synchronised responses to monetary policy shocks from the US which are similar to inflation in the US, and for non-oil output growth, there is no clear indication that US monetary policy can be as effective for the GCC countries as it is domestically. Consequently, importing US monetary policy via a Dollar peg may guarantee only stable inflation for the GCC countries - not necessarily stable non-oil output growth. If the non-oil output response is made conscientiously - and there are concerns over the Dollar's ability to perform its role as a store of value - a basket peg with both the US Dollar and the Euro may be a sound alternative as confirmed by the variance decomposition analysis of our augmented SVAR with a proxy for the European short-term interest rate.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34003.

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Date of creation: 2009
Date of revision: 2010
Publication status: Published in THe World Economy 12.33(2010): pp. 1898-1922
Handle: RePEc:pra:mprapa:34003

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Keywords: GCC Countries; US monetary policy shock; monetary union; currency peg; SVARs;

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Cited by:
  1. Fischer, Christoph, 2012. "Currency blocs in the 21st century," BOFIT Discussion Papers 24/2012, Bank of Finland, Institute for Economies in Transition.
  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. Jean Louis, Rosmy & Brown, Ryan & Balli, Faruk, 2011. "On the feasibility of monetary union: Does it make sense to look for shocks symmetry across countries when none of the countries constitutes an optimum currency area?," Economic Modelling, Elsevier, vol. 28(6), pages 2701-2718.

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