| Fueled by the successful introduction of the Euro in 1999, monetary integration has become an increasingly important phenomenon within the modern global economic era. The Gulf Cooperation Council (GCC) is no exception. While the six countries of the GCC, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (U.A.E.), have been planning an economic, political and monetary union since early 1980, it only gained momentum in the last five years. This dissertation focuses on the economic elements of a monetary union, with particular reference to the Optimal Currency Area (OCA). It applies the theory of an OCA to determine the feasibility of a monetary union for all or some GCC countries.; Chapter II is an extensive literature review of the traditional OCA theory. The OCA criteria are applied to the GCC countries to determine whether the region is an OCA. I find that the GCC countries satisfy six out of the nine OCA criteria found in the literature. While the three unmet criteria are not likely to be satisfied after the formation of the monetary union, their impact on the union would depend on the similarity of shocks among the six countries.; Chapter III employs several approaches to analyze the nature of economic shocks hitting the GCC countries. First, a structural vector autoregressive (SVAR) model of gross domestic product (GDP) and inflation is used to identify the type, size, correlation, and frequency of aggregate demand and supply disturbances. Second, the frequency and convergence of business cycles among GCC countries are analyzed. These approaches show very high correlations between GCC countries' shocks and growth paths especially in recent years.; In Chapter IV, a test of whether a currency union membership is associated with a change in intra- and extra-union foreign direct investment (FDI) activities is conducted. The statistical analysis finds that a common currency union does have a positive and statistically and economically significant impact on extra-union FDI and a positive, but insignificant impact on intra-union FDI. The overall impact of a currency union on FDI activity appears to be positive and increases with the member's market size. |
