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 5: The GCC Monetary Union: Choice of Exchange Rate Regime

Mohsin S. Khan

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


1 Mohsin S. Khan INTRODUCTION The creation of a monetary union has been an overriding objective of the regional economic integration process among Gulf Cooperation Council (GCC) members since the early1980s.2 Since then, the GCC member countries have come a long way on the road to economic integration. When established, the GCC monetary union would be the second most important supranational monetary union in the world in GDP terms, second only to the European Monetary Union.3 The experience of monetary unions elsewhere in the world can provide useful insights into the challenges that the planned GCC monetary union faces. Currently, there are five monetary unions in the world. Three of these unions are in Africa, one in the Caribbean and one in Europe. In all of them, a new common currency was created, except in the Southern African Common Monetary Area (CMA), in which the South African rand is the common currency in circulation. The GCC countries are probably the most homogeneous among the unions, sharing a common history, language and culture.4 They are mainly oil exporters (with the exception of Bahrain), are very open to trade and imported labor, have very flexible labor markets in which even nominal wages can adjust and have complete factor mobility within the group. Further, they all have full convertibility. One could argue that the GCC countries have already fulfilled many of the preconditions for a currency union. Overall, the GCC meets the generally accepted criteria for a single currency among its members, namely...

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