An empirical investigation into the appropriate foreign exchange rate arrangement

This study evaluates alternatives of exchange rate regimes or arrangements to predict the most appropriate arrangement that is economically and politically feasible for the Gulf Cooperation Council (G. C. C.) States to adopt for the purpose of coordinating their exchange rate policies.; The findings of this study indicate that pegging G. C. C. currencies to the Special Drawing Rights (SDR) basket would be the most economically and politically appropriate exchange rate arrangement for the G. C. C. States. Moreover, the economic characteristics of these states indicate that they are not ready at their current stage to form a full monetary union. However, these states are economically qualified for several forms of partial monetary integration, such as an exchange rate coordination arrangement, a payments union, a parallel currency, a reserve-pooling arrangement, and capital market integration.; This study also concludes that the expected costs and benefits to the G. C. C. States of the formation of an exchange rate coordination arrangement are limited to those resulting from the creation of a full monetary union. This is especially true because of the slow growth of intra-G. C. C. trade. Several important steps are suggested in this study to enhance this trade. These steps are also very likely to result in a faster realization of the benefits of this arrangement. For the the being, however, the adoption of such an arrangement is still very important. This is because it represents an initial commitment by the G. C. C. States to work together towards more monetary integration and perhaps towards the formation of a single currency area at a later stage when the necessary conditions are met.; The most obvious policy implication of this arrangement is that once these states agree to fix their exchange rates, then each country will be very limited in using its own exchange rates as a monetary instrument for correcting any imbalance or deficit in its balance of payments. Another implication is that these states should be prepared to subsidize or finance such an imbalance or deficit of another member when that member is unable to correct its imbalance or finance its deficit through other policies or means.; For the distribution of costs and benefits that result from the economic cooperation among these states, it has been pointed out in this study that political compromise is a very important element of this distribution, especially because these states are not equal in terms of economic dominance and/or economic development. Moreover, this study also concludes that the most appropriate method of compensation for the G. C. C. States regarding the uneven distribution of costs and benefits is the method currently being used. Under this method, compensation is made through fiscal incentives and policies.; In conclusion, the cooperation strategy of the G. C. C. States' for achieving monetary and economic integration, which has been adopted by the G. C. C. since its formation, is endorsed in this study. This is because the one-step or centralization strategy of monetary integration is not consistent with the political systems of these states. (Abstract shortened by UMI.)...