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Is the US Dollar a Suitable Anchor for the Newly Proposed GCC Currency?

  • Rosmy Jean Louis
  • Mohamed Osman
  • Faruk Balli

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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Article provided by Wiley Blackwell in its journal The World Economy.

Volume (Year): 33 (2010)
Issue (Month): 12 (December)
Pages: 1898-1922

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Handle: RePEc:bla:worlde:v:33:y:2010:i:12:p:1898-1922
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