Essay on Establishing Conversion Values for the Planned Gulf Cooperation Council (GCC) Currency Union

Abstract A key issue in creating a new currency union is setting the rates to convert national currencies into the new union currency. We propose a forward-looking econometric methodology to determine conversion rates in the planned GCC currency union by calculating the degree of misalignment in the real exchange rate. For each GCC currency, we first identify the year at which the economy is the closest to its internal and external equilibrium, and then estimate the degree of misalignment in the bilateral real exchange rate vis-à-vis the U.S. dollar, based on WEO forecasts until 2013.Our calculations suggest that there is no need to adjust the actual rates to establish the conversion, as the forecasted misalignments are minor (less than 5%). Arabic Abstract: