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Gulf Monetary Union and Regional Integration

Author

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  • M. Kabir Hassan

    () (Dept. of Economics and Finance, University of New Orleans, USA)

  • Ashraf Nakibullah

    () (Dept. of Economics and Finance, College of Business, University of Bahrain)

Abstract

Currencies of the GCC countries have long been effectively pegged to the US dollar. Since 2003 the GCC countries have formally started pegging their currencies to the US dollar as a first step towards the proposed monetary union in 2010. The prevailing dollar peg and the absence of any significant current and capital account restrictions led some to believe that these countries have lost monetary independence. Contrary to this belief, the paper presents evidence that interest rates of the GCC countries did not converge to the interest rates of the US implying that the assets of the GCC countries are not perfect substitutes to the US assets. This imperfect asset substitutability has allowed the GCC countries to maneuver their monetary policies and the central banks of the GCC countries have had some control over their money growth rates by sterilizing the changes in international reserves. Results indicate that the monetary authorities of these countries used domestic credit policy to attain domestic policy objective of price level stability while engaging in sterilized foreign exchange intervention. This result implies that the proposed GCC central bank should be able to maintain the monetary independence as a group and can reap the benefit of monetary efficiency of the proposed Gulf Monetary Union in 2010.

Suggested Citation

  • M. Kabir Hassan & Ashraf Nakibullah, 2008. "Gulf Monetary Union and Regional Integration," Working Papers 453, Economic Research Forum, revised 09 Jan 2008.
  • Handle: RePEc:erg:wpaper:453
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    References listed on IDEAS

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    1. E.O. Svensson, Lars, 1994. "Why exchange rate bands? : Monetary independence in spite of fixed exchange rates," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 157-199, February.
    2. Darby, Michael R. & Lothian, James R. & Gandolfi, Arthur E. & Schwartz, Anna J., 1983. "The International Transmission of Inflation," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226136417, May.
    3. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September.
    4. Obstfeld, Maurice, 1983. "Exchange rates, inflation, and the sterilization problem: Germany, 1975-1981," European Economic Review, Elsevier, vol. 21(1-2), pages 161-189.
    5. Michael R. Darby & James R. Lothian, 1983. "V. Conclusions: Conclusions on the International Transmission of Inflation," NBER Chapters,in: The International Transmission of Inflation, pages 491-524 National Bureau of Economic Research, Inc.
    6. Maurice Obstfeld & Kenneth Rogoff, 1995. "The Mirage of Fixed Exchange Rates," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 73-96, Fall.
    7. 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.
    8. Herring, Richard J. & Marston, Richard C., 1977. "Sterilization policy: The trade-off between monetary autonomy and control over foreign exchange reserves," European Economic Review, Elsevier, vol. 10(3), pages 325-343.
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