Could GCC Countries Achieve an Optimal Currency Area?

Abstract

The main objective of this paper is to test for the possibility of an optimal currency area (OCA) in the six Gulf countries (namely: Saudi Arabia, Bahrain, Qatar, Kuwait, Oman, and United Arab Emirates (UAE)). To constitute such an OCA, however, they must satisfy certain preconditions; i.e., they must have similar economic structures with exposure to symmetric shocks, they must be open, well-diversified economies, and they must also ensure a high degree of factor mobility. The objective of this paper is to assess the degree to which the Gulf Cooperation Council (GCC) meet the requirements of an OCA. Annual and quarterly data are used in our analysis. Using a multivariate threshold autoregression (MVTAR) model and generalized response functions, the main results are that the GCC countries should be divided, as far as the symmetry of the shocks is concerned, into two sub-groups. The first consists of UAE, Oman, and Bahrain and the second consists of Saudi Arabia, Qatar, and Kuwait. Thus, the main implication is that the GCC countries are still far away from an OCA. The success of such a union is conditional on a lot of measures including the removal of domestic and cross-border distortions that are regarded as a hamper to trade and foreign investments, the coordination of national policies that ensure macroeconomic stability, the deepening of regional integration, the development of the nonoil economy, and realization of a large degree of political integration.