Synchronization of Economic Shocks between Gulf Cooperation Council and United States, Europe, Japan, and Oil Market: Choice of Exchange Rate Regime

19 Pages Posted: 6 Oct 2012

See all articles by Won Joong Kim

Won Joong Kim

Konkuk University - Department of Economics

Shawkat M. Hammoudeh

Montpellier Business School; Drexel University - Lebow College of Business

Eisa Aleisa

Government of the Kingdom of Saudi Arabia - Saudi Arabian Monetary Agency (SAMA)

Date Written: October 2012

Abstract

Using a structural vector autoregression (SVAR) with block exogeneity, this study examines the impacts of external shocks originating from the United States, the European Union, Japan, and the oil market as well as those of the regional shocks, on the oil‐rich countries of the Gulf Cooperation Council (GCC), viewed as a prospective monetary union. It takes into account the implications of the shock impacts for selecting an appropriate common exchange rate arrangement. The SVAR variance decomposition and impulse response analyses strongly underscore the relative impacts of the global shocks over the regional ones. The findings imply that the world's two major currencies, the U.S. dollar and the euro, should figure highly in a GCC's common basket of currencies. Accordingly, a transitional movement to a more flexible exchange rate arrangement such as a basket peg may be desirable for these trade‐dependent economies in the long run, as is argued in the optimal currency literature for developing countries.

JEL Classification: E52, O52, C22

Suggested Citation

Kim, Won Joong and Hammoudeh, Shawkat M. and Aleisa, Eisa, Synchronization of Economic Shocks between Gulf Cooperation Council and United States, Europe, Japan, and Oil Market: Choice of Exchange Rate Regime (October 2012). Contemporary Economic Policy, Vol. 30, Issue 4, pp. 584-602, 2012. Available at SSRN: https://ssrn.com/abstract=2157837 or http://dx.doi.org/10.1111/j.1465-7287.2011.00279.x

Won Joong Kim

Konkuk University - Department of Economics ( email )

Seoul
Korea, Republic of (South Korea)

HOME PAGE: http://economic.konkuk.ac.kr

Shawkat M. Hammoudeh

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, 34080
France

Drexel University - Lebow College of Business ( email )

3141 Chestnut Street
Philadelphia, PA 19104
United States
2158956673 (Phone)
2158956975 (Fax)

HOME PAGE: http://faculty.lebow.drexel.edu/HammoudehS/

Eisa Aleisa

Government of the Kingdom of Saudi Arabia - Saudi Arabian Monetary Agency (SAMA) ( email )

Saudi Arabia

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