In recent years there have been reports that a group of six Gulf countries (Bahr

Question

In recent years there have been reports that a group of six Gulf countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates) were considering the introduction of a single currency. Currently, these countries use currencies that are effectively pegged to the U.S. dollar. These countries rely heavily on oil exports to the rest of the world, and political leaders in these countries are concerned about diversifying trade. Based on this information, discuss the OCA criteria for this group of countries. What are the greatest potential benefits? What are the potential costs?

Explanation / Answer

The eliminatoion of uncertainity regarding the value of the domestic currency relative tothe US dollar is the most potential benefit arising from this. These countries manitains a peg against the US dollar, so they are differently pegged to each other. There is always a chance of speculative attack, creating addaed risk of that potentially hinders trade with an exchange rate peg. If these countries adopt a region wide currency such as EURO in EU, the risk would be eliminated. The benefits of adopting a single currency will greater if these countries have high rate of integration. From a lack of autonomous monetary policy potential cost arises. The countries within the region would need to establish a region wide central bank as ECB for making monetary policy decession of the region. The cost of forgoimng autonomous monetary policy will be grater if an individual country or group of countries is subjected to assymetric shocks. However because these countries rely heavily on oil exports, they are more likely to experience similiar shocks.

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