Gulf Monetary Union and Regional Integration

M. Kabir Hassan and Ashraf Nakibullah ()
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Ashraf Nakibullah: Dept. of Economics and Finance, College of Business, University of Bahrain

No 453, Working Papers from Economic Research Forum

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.

Pages: 23
Date: 2008-01-09, Revised 2008-01-09
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