Currency Union and Exchange Rate Issues

Currency Union and Exchange Rate Issues

Lessons for the Gulf States

New Horizons in Money and Finance series

Edited by Ronald MacDonald and Abdulrazak Al Faris

This book – written by leading academics and practitioners in the field – brings together cutting edge research on exchange rate regime and monetary union issues. There is a particular focus on the implications for member states of the Gulf Cooperation Council which is itself working towards forming a monetary union for the Gulf States.

Chapter 3: Economic, Political and Institutional Prerequisites for Monetary Union Among the Members of the Gulf Cooperation Council

Willem H. Buiter

Subjects: economics and finance, financial economics and regulation, international economics, social policy and sociology, migration


1 Willem H. Buiter2 INTRODUCTION This chapter considers the viability and desirability of alternative exchange rate regimes for the six members of the Gulf Cooperation Council (GCC) – the United Arab Emirates, the Kingdom of Bahrain, the Kingdom of Saudi Arabia, the Sultanate of Oman, the State of Qatar and the State of Kuwait. There are two key dimensions of the currency regimes of the GCC countries: the internal exchange rate regime and the external exchange rate regime. The internal currency regime choice concerns the exchange rate regime of each of the GCC members with regard to the other members. The external exchange rate regime concerns the exchange rate regime of the GCC as a whole vis-à-vis the rest of the world. The two cannot, in general, be specified independently. If every GCC member has a well-defined regime for its national currency regarding some external currency or basket of currencies, this would fully determine the ‘internal’ relationships among the external values of the six GCC national currencies. However, the opposite does not hold. Even if the six GCC countries were to adopt a common currency, this would leave completely open the issue of how the external value of this common currency is to be managed or determined. I will not focus on the optimal external exchange rate regime of a GCC monetary union, other than noting that it is unlikely to involve a currency peg with regard to the US dollar, as this is the regime whose shortcomings are currently...

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