How Closely the GCC Approximates an Optimum Currency Area?

Abstract

The six Gulf Cooperation Council (GCC) countries (namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and U.A.E.) have exhibited considerable cooperation in the past for deepening the process of economic integration, and there is an animated debate in the academic and policy circles as to whether the integration process can be intensified and carried forward so that eventually a common currency could replace the six national currencies by the year 2010 ** . The academic debate on optimum currency area suggests that individual countries at times may be better off just by joining hands to have a single currency, instead of each having its own currency. For several countries to constitute such an optimum currency area, however, they must satisfy certain preconditions; i.e., they must have similar economic structures with exposure to symmetric shocks, they must be open economies, well diversified and must also ensure high degree of factor mobility. In the context of this theoretical debate, this paper aims at assessing the degree to which the GCC may be meeting the requirements of an optimum currency area.