GCC monetary union prospective effects on trade and economic growth

This thesis empirically investigates two important aspects of the benefits of currency (monetary) union - the beneficial impact of eliminating exchange rate volatility on trade and the possibility of consequent economic growth - in the context of the Gulf Cooperation Council (GCC) countries. Researchers on the GCC monetary union have mostly been busy in analyzing the viability of the proposed GCC monetary union and they focus on convergence criteria. In contrast to those studies, empirical estimates obtained in this study would provide valuable information to the policy makers who have been working towards the realization of the GCC monetary union. As such this study provides significant contribution to the literature of the GCC monetary union. Chapter 2 thoroughly reviews the optimum currency areas (OCA) literature (both theoretical and empirical) starting with the theories advocated by the pioneers of the OCA. Literature on the European Monetary Union (EMU), monetary unions and integration from African, Latin America, Asian and the prospects from the GCC countries are also reviewed. Chapter 3 empirically investigates convergence criteria and shock synchronization of the GCC countries. Results show positive correlation of the structural shocks (synchronized shocks) among the countries except Qatar. Chapter 4 estimates the impact of exchange rate volatility on bilateral trade between the GCC countries. Results obtained using the panel Generalized Method of Moments (GMM) estimator indicates that the bilateral trade among the GCC countries will increase about 6.2 - 8.7 percent (depending on the volatility measure used) with the elimination of the exchange rate volatility. In the second part of the chapter 4 discusses the role of trade on economic growth (income) of a country and estimates the impact of trade on per capita growth rates of the GCC countries. Results based on the preferred sample period and using the panel GMM estimator indicate that a one-standard deviation increase in the trade (or openness) ratio would increase the growth rate per capita on impact by 2 - 3%. Based on these results we may conclude that the monetary union of the GCC countries would enhance trade which in turn would promote economic growth of the region.