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SYNCHRONIZATION OF ECONOMIC SHOCKS BETWEEN GULF COOPERATION COUNCIL AND UNITED STATES, EUROPE, JAPAN, AND OIL MARKET: CHOICE OF EXCHANGE RATE REGIME †
Author(s) -
KIM WON JOONG,
HAMMOUDEH SHAWKAT,
ALEISA EISA A.
Publication year - 2012
Publication title -
contemporary economic policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.454
H-Index - 49
eISSN - 1465-7287
pISSN - 1074-3529
DOI - 10.1111/j.1465-7287.2011.00279.x
Subject(s) - economics , exchange rate , vector autoregression , international economics , shock (circulatory) , liberian dollar , variance decomposition of forecast errors , endogeneity , currency , monetary economics , european union , exchange rate regime , optimum currency area , macroeconomics , international trade , econometrics , finance , medicine
Using a structural vector autoregression (SVAR) with block exogeneity, this study examines the impacts of external shocks originating from the United States, the European Union, Japan, and the oil market as well as those of the regional shocks, on the oil‐rich countries of the Gulf Cooperation Council (GCC), viewed as a prospective monetary union. It takes into account the implications of the shock impacts for selecting an appropriate common exchange rate arrangement. The SVAR variance decomposition and impulse response analyses strongly underscore the relative impacts of the global shocks over the regional ones. The findings imply that the world's two major currencies, the U.S. dollar and the euro, should figure highly in a GCC's common basket of currencies. Accordingly, a transitional movement to a more flexible exchange rate arrangement such as a basket peg may be desirable for these trade‐dependent economies in the long run, as is argued in the optimal currency literature for developing countries. ( JEL E52, O52, C22)