Establishing Conversion Values for New Currency Unions: Method and Application to the planned Gulf Cooperation Council (GCC) Currency Union

By Bassem M Kamar, Jean-Etienne Carlotti, Russell C Krueger

August 1, 2009

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Bassem M Kamar, Jean-Etienne Carlotti, and Russell C Krueger. Establishing Conversion Values for New Currency Unions: Method and Application to the planned Gulf Cooperation Council (GCC) Currency Union, (USA: International Monetary Fund, 2009) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

A key issue in creating a new currency union is setting the rates to convert national currencies into the new union currency. Planned unions in the Gulf region and Africa are seeking methods to set the conversion rates when their new currencies are created. We propose a forward-looking econometric methodology to determine conversion rates by calculating the degree of misalignment in the real exchange rate, and apply it to the GCC currency union. For each GCC currency, we identify the year at which the economy is the closest to its internal and external equilibrium, and then estimate the degree of misalignment in the bilateral real exchange rate vis-à-vis the U.S. dollar based on WEO forecasts until 2013. Application of the methodology to other regions is also considered.

Subject: Currencies, Exchange rates, Monetary unions, Real effective exchange rates, Real exchange rates

Keywords: Currency union, GCC country, GCC currency, Nominal exchange rate, U.S. dollar, WP

Publication Details

Pages:

58
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2009/184
Stock No:

WPIEA2009184
ISBN:

9781451873313
ISSN:

1018-5941

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