Is the Announced Monetary Union in GCC Countries Feasible? A Multivariate Structural VAR Approach

Abstract This paper tests the desirability and feasibility of establishing a monetary union in GCC countries using a multivariate structural Vector Autoregression Model (VAR) for the period 1980-2006. The paper builds on the earlier work, capitalizing on a methodology that captures supply and demand disturbances impinging on individual economies. Co-movement of shocks across countries is considered a crucial condition towards integration in a common currency area. Shocks are based on the estimation of a structural VAR model that comprises world real output, domestic output, real exchange rates and the price level. Based on correlations using demand and monetary shocks, the paper establishes the following results: (i) countries of the region are still far from the necessary conditions to ensure the success of joining a currency union. Nevertheless, for a subset of countries (Saudi Arabia, the United Arab Emirates and Qatar), conditions suggest higher potential to take the lead in endorsing and fostering a common currency zone, (ii) a higher degree of labor mobility, openness, and intra-regional mobility are still desired to accelerate regional integration and ensure a steady path towards the establishment of a currency union. Arabic Abstract: