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External and Regional Shocks in the GCC Region: Implications for a Common Exchange Rate Regime

Listed author(s):
  • Eisa A. Aleisa

    ()

    (Monetary and Capital Market Dept. (MCM), International Monetary Fund, Washington, DC)

  • Shawkat Hammoudeh

    ()

    (Lebow College of Business, Drexel University, Philadelphia)

  • Yuan Yuan

    ()

    (Lebow College of Business, Drexel University, Philadelphia)

Using a structural cointegrated VAR, this study examines the impacts of external shocks originating from the dollar, euro and yen zones as well as the regional shocks on the oilrich countries of the Gulf Cooperation Council (GCC), viewed as a prospective monetary union. It focuses on the implications of shock impacts for selecting an apposite common exchange rate regime. The SVECM variance decomposition and impulse response analyses strongly underscore the relative impacts of the two external shocks over the regional ones. The findings imply that the world’s three major currencies should figure highly in the GCC’s common basket of currencies. Accordingly, a transitional movement to a more flexible exchange rate may be desirable for these trade-dependent economies in the long run, as argued in the optimal currency literature for developing countries.

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Paper provided by Economic Research Forum in its series Working Papers with number 426.

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Length: 24
Date of creation: 06 Jan 2008
Date of revision: 06 Jan 2008
Publication status: Published by The Economic Research Forum (ERF)
Handle: RePEc:erg:wpaper:426
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  1. Jeffrey Frankel & Sergio Schmukler & Luis Serven, 2000. "Verifiability and the Vanishing Intermediate Exchange Rate Regime," NBER Working Papers 7901, National Bureau of Economic Research, Inc.
  2. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  3. GINSBURGH, Victor A., "undated". "A further note on the derivation of quarterly figures consistent with annual data," CORE Discussion Papers RP 161, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Behrouz Guerami & S. Nuri Erbas & George T. Abed, 2003. "The GCC Monetary Union; Some Considerations for the Exchange Rate Regime," IMF Working Papers 03/66, International Monetary Fund.
  5. Mongelli, Francesco Paolo & De Grauwe, Paul, 2005. "Endogeneities of optimum currency areas: what brings countries sharing a single currency closer together?," Working Paper Series 468, European Central Bank.
  6. Crowder, William J. & Wohar, Mark E., 1998. "Cointegration, forecasting and international stock prices," Global Finance Journal, Elsevier, vol. 9(2), pages 181-204.
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