Gulf Cooperation Council Monetary Union: Business Cycle Synchronization, Shocks Correlation

Abstract

In this paper we assess the readiness of the Gulf cooperation council members (Qatar, Saudi Arabia, Kuwait and Bahrain) to form a viable currency monetary area. It deals with business cycle synchronization and economic shocks correlation. To do so we employ different methods, first we extract the business cycle component of output using Hodrick-Prescott filter. Second, supply and demand shocks are recovered from an estimated structural VAR model of output growth and inflation using long run restriction (Blanchard and Quah). We then check the (A) symmetry of these shocks by calculating the correlation between GCC countries.

It’s appears from our investigation that there is no business cycle synchronization evidence between GCC countries, business cycle is rather divergent among them. And despite of the demand shocks symmetry, supply shocks are rather asymmetric. We therefore conclude that there is no evidence of the readiness of the GCC members to form a monetary currency union