Is the GCC an optimum currency area (OCA)? Empirical answers from co-movements

Abstract

Purpose This paper aims to investigate whether the Gulf Cooperation Council (GCC) is an optimum currency area in the wake of the global financial crisis and low oil prices using annual data from 2000 to 2016. Design/methodology/approach It applies the European Monetary Union as a reference point and co-movement methodology on key variables such as gross domestic product, inflation, terms of trade and current account balance. The findings revealed that all countries meet the macroeconomic convergence criteria and there is greater co-movement of these variables in the GCC. Findings Furthermore, the degree of co-movements increases during the financial crisis and recent low oil prices, which signifies the synchronization of shocks. However, labor is less mobile in the region and current account balance co-movement is relatively weak, but with the endogeneity of a monetary union, these constraints will evaporate as the zone enters monetary unification. The paper recommends that for the GCC monetary union to happen and be sustainable, there needs to be political will. The paper also recommended for the zone to have a common identification card so that nationals can move and work freely within the GCC region. Originality/value The study defers from the others in the following: this paper considered shock synchronization and co-movement methodology, which has not been applied in the region to assess its feasibility as an OCA.