Abstract
This article applies the theory of Generalized Purchasing Power Parity (G‐PPP) to assess the potential for an optimum currency area (OCA) for the Gulf Cooperation Council (GCC) countries over the period 1973–2009. Utilizing a multivariate cointegration procedure that allows for up to two predetermined structural breaks, the results suggest that theGCCcountries could form anOCAsince macroeconomic conditions are in favor of forming anOCA, i.e., real exchange rates share common trends and the parameter stability test indicates that the G‐PPPrelationship has been stable for the period analyzed. Moreover, the results suggest that the withdrawal ofOman and/orUnitedArabEmirates (UAE) from the union has no impact on forming the union. However, based on otherOCAcriteria, the results suggest that theOCAmay be challenged.
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