Monetary Union Among Arab Gulf Cooperation Council (AGCC) Countries: Does the symmetry of shocks extend to the non-oil sector?

Louis, Rosmy and Balli, Faruk and Osman, Mohammad (2008): Monetary Union Among Arab Gulf Cooperation Council (AGCC) Countries: Does the symmetry of shocks extend to the non-oil sector?

Abstract

AGCC countries' output is heavily dichotomized into oil and non-oil. The oil shocks have similar effects on all member countries but little is known about their responses to non-oil shocks. This paper sets out to determine whether (1) aggregate demand (AD) and non-oil supply shocks (AS) are symmetrical across these countries to justify their suitability for monetary union; and (2) whether there is any commonality of shocks with the United States and the three major European countries, namely France, Germany, and Italy, which can warrant the choice of either the US dollar or the Euro as the anchor for the expected common currency of the bloc. We use bivariate structural vector autoregression models identified with long-run restrictions a la Blanchard and Quah (1989) to extract the shocks. Our results show that (a) AD shocks are unequivocally symmetrical but non-oil AS shocks are weakly symmetrical across AGCC countries thereby giving a green light for monetary union; (b) neither AD nor AS shocks are symmetrical between AGCC countries and the selected European countries; (c) AGCC's AD shocks are symmetrical with the US but non-oil AS shock are not. We therefore surmise that the US dollar is a far better candidate for the new currency than the Euro since US monetary policy can at least help smooth demand shocks in AGCC countries. Our results hold even when we consider the AGCC countries as a bloc. This paper makes a valuable contribution to AGCC decision makers who have been wrestling with the dilemma of whether to revalue or to depeg their actual currencies.

• Item Type: MPRA Paper
• Language: English
• Keywords: AGCC, monetary union, shocks symmetry, currency anchor
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; F - International Economics > F3 - International Finance > F33 - International Monetary Arrangements and Institutions; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration

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