GCC Monetary Union and the Degree of Macroeconomic Policy Coordination
35 Pages Posted: 25 Jan 2008
Date Written: October 2007
Abstract
Coordinating macroeconomic policies is a pre-requisite to a successful launch of the common currency in the GCC countries. Relying on the Behavioral Equilibrium Exchange Rate approach as a theoretical framework, we apply the Pooled Mean Group methodology to determine the similarity of the impact of a selected set of macroeconomic indicators on the real exchange rate in each country. Our empirical evidence points to a clear coordination of monetary policy, fiscal policy, government consumption, and openness across the member countries. While RER misalignments also show a substantial convergence building over time, differences in the misalignments of the two polar cases remain rather substantial, calling for further coordination and policy harmonization.
Keywords: Working Paper, Cooperation Council for the Arab States of the Gulf, Monetary unions, Monetary policy, Financial integration, Foreign exchange, Economic policy, Central bank policy
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