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The optimality of a gulf currency union: Commonalities and idiosyncrasies

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  • Rafiq, M.S.

Abstract

A high degree of shared national elements that drive the bulk of observed output volatility between countries is generally seen as a necessary prerequisite for the formation of a successful monetary union. This is because countries in a monetary union accept a one-size-fits all, resigning regions to policies that are based on some aggregate macroeconomic target rather than a country-specific one. For this reason, the cost of monetary union membership depends on the incidence of asymmetric (nation-specific) shocks rather than symmetric, or common shocks. This criteria is examined for the Gulf Cooperation Council (GCC) countries, who reaffirmed plans for the implementation of a single currency. This paper quantifies, using structural factor models with common factor restrictions, changes in output synchronisation, the importance of common factor or idiosyncratic shocks between the regions, and the synchronisation of these shocks across the GCC as well as the implications for GCC-wide macroeconomic policy at short-to-medium term horizons. Despite current difficulties in fulfilling the convergence criteria goals to monetary union, the results show the synchronisation of output growth fluctuations between economies of the GCC to have increased over the past 25years. This paper also finds that a fairly sizeable proportion of output fluctuations in business cycle frequencies are driven by a common component that, to some degree, reflects U.S. monetary policy and U.S. demand shocks as well as changes in crude oil prices.

Suggested Citation

  • Rafiq, M.S., 2011. "The optimality of a gulf currency union: Commonalities and idiosyncrasies," Economic Modelling, Elsevier, vol. 28(1), pages 728-740.
  • Handle: RePEc:eee:ecmode:v:28:y:2011:i:1:p:728-740
    DOI: 10.1016/j.econmod.2010.05.007
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    Cited by:

    1. Christian Dreger & Teymur Rahmani, 2016. "The impact of oil revenues on the Iranian economy and the Gulf states," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 40(1), pages 36-49, March.
    2. repec:ipg:wpaper:2014-568 is not listed on IDEAS
    3. Takagi, Shinji, 2012. "Establishing Monetary Union in the Gulf Cooperation Council: What Lessons for Regional Cooperation?," ADBI Working Papers 390, Asian Development Bank Institute.
    4. Khalid Rashid, Alkhater & Syed Abul, Basher, 2015. "The oil cycle, the Federal Reserve, and the monetary and exchange rate policies of Qatar," MPRA Paper 65900, University Library of Munich, Germany.
    5. repec:bla:worlde:v:40:y:2017:i:10:p:2153-2171 is not listed on IDEAS

    More about this item

    Keywords

    Common factors; Synchronisation; Shocks; Spillovers; Propagation;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F2 - International Economics - - International Factor Movements and International Business

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