Central Bank for GCC Research Paper Example | Topics and Well Written Essays - 1250 words

Central Bank for GCC - Research Paper Example International financial crisis in the recent years calls for monetary integration and regional cooperation of the countries for efficiently dealing with the crises and protecting the interests of the member countries. The monetary policies of a central bank plays pivotal role in regulating interest rates and inflation in the countries with a view to ensure economic growth. The monetary policies of a central bank have impact on various economic factors such as employment, liquidity in the system and stability of the currencies. Central bank proposed for the GCC countries aims at financial stability in the GCC countries with a view to reorient the strategies of the group countries in response to the dynamic international economic situation and to promote economic cooperation among the group countries. Therefore, the structure of the central bank should be designed to achieve these objectives in relation to the group countries. ... Under the monetary policies of GCC central bank, stability in exchange rate could be achieved. The member countries of GCC peg their currencies to USD and their interest rates are fixed based on the changes interest rates in US. Adjustments in interest rates in sync with US policy might have negative impacts on domestic economies of the GCC countries. Currency unification is expected to delink pegging of GCC currencies to USD. The member countries are not yet prepared for monetary union. There are differences in economic fundamentals among the countries. Trading and transactions within the region is very limited, and the countries are mostly dependent on oil exports. Lack of efforts towards economic integration and institutional development are the important drawbacks. The differences in the economic policies followed by the GCC countries would make the unification process difficult. Three different methods used to test the GCC economies by Abu-Bader and Abu-Qarn (2006), the Structur al VAR, co-integration tests and common business cycles provide no support for establishing a monetary union (AlKholifey & Alreshan, p. 19). They also observed ‘that neither AD nor AS shocks are symmetrical between the GCC countries and the selected European countries’ (p. 20) while AD refers to Aggregate Demand and AS, Aggregate Supply. Structure of the suggested Central Bank for GCC Monetary union in GCC can stimulate uniformity in macroeconomic policies within the union and inter alia improve investment options and allocation of resources within the region. Fundamental factor involved in establishing central bank or monetary union is convergence of monetary, fiscal and structural policies of the member countries. According to Sturm and Siegfried (2005, p. 63), ‘monetary union