Moral Hazard in a Single Currency Union, the case of GCC - Essay Example

From this perspective, we can claim about the sensibility of currency and we can see a low degree of openness between the members as a group and the rest of the world.A currency union, also referred to as monetary union, refers to a situation where two or more countries use a similar currency without need fully having any other consolidation such as the monetary or economic union. There are three kinds of currency unions i.e. formal, formal but with common policy and informal union. Informal currency union refers to the one-sided espousal of foreign currency while formal currency union refers to the embracing a foreign currency on the merit of multilateral or bilateral concurrence with the offering authority.

Formal with a common policy refers to an institution established by a number of states with a mutual offering authority for the currency and monetary policy. This paper seeks to shed more light on the rationale for having a common currency of the GCC. Key aspects that are considered include the synchronization of business cycles among the member states in the Gulf region.Over the past few decades there have key developments in currency fusions and monetary consolidations occurred. This introduction of exchange regions dates back to the Mundell’s Optimum Currency Areas.

He asserts that “ if the world can be divided into regions within each of which there is a factor mobility and between which there is factor immobility, then each of these regions should have a separate currency that fluctuates relative to all other currencies”. The mobility of the inputs should act as the adjusting instrument if any region experiences asymmetric shock.