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The Future Gulf Currency Union - Essay Example

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The general argument for those supporting the formation of the GMU has been that it will bring economic and political integration of…
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The Future Gulf Currency Union
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Download file to see previous pages However, one has to be concerned about the factors that led to the success of monetary unions for the US and Euro-zone. The economy of the Gulf States is homogenous in nature, which relies heavily on oil. In contrast, the economy of the Euro-zone and US is heterogeneous with each state relying on diversified economic sectors.
The economics of the currency unification are clearly spelt out by Mundell (1961) in his theory of optimum currency areas. According to Mundell R. A. (1961), for a successful currency union there should be factor mobility within the region of currency union, while there should be factor immobility between other regions in the world. So what are these factor mobility and factor immobility for the case of the Gulf States? These are factors of production within the region of currency union. The mobility of factors of production helps to compensate for asymmetrical economic shocks in the region of currency union. The asymmetrical economic shocks are normally adjusted for by the flexibility of the currency exchange rates. Without these adjustments or the mobility of the factors of production, unemployment and inflation would result. In line with the premise advocated by Mundell R. A., (1961), there should be little movement of factors of production outside the region of currency union.
This paper will examine the case of the Gulf States in order to form an opinion on whether a monetary union is feasible based on the theory of optimum currency areas advocated by Mundell R. A. (1961). The situations leading to the formation of United States and Euro-zone currency union will be examined in order to determine how well they compare with the impending Gulf Monetary Union. The paper will further examine the economies of the six member countries, namely; Bahrain, Oman, Kuwait, Qatar, Saudi Arabia, and United Arab Emirates (UAE), and see the impacts, which the use of a common currency can have on them. The factors that can ...Download file to see next pagesRead More
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