The GCC Monetary Union - Choice of Exchange Rate Regime

One of the critical decisions in the formation of a monetary union is the choice of an appropriate exchange rate regime for the single currency. The member countries of the Gulf Cooperation Council (GCC) agreed in 2003 to peg their currencies to the U.S. dollar and to maintain the parity until the establishment of the GCC Monetary Union in 2010. A decision on the exchange rate regime for the single GCC currency would be made then. Although the choice of the U.S. dollar peg as the external anchor for monetary policy served the countries of the GCC well for many years in maintaining macroeconomic stability, rising inflationary pressures in the last two to three years, the continuing depreciation of the U.S. dollar against major currencies, and differing economic cycles and policy needs to that of the anchor country (the United States) have raised questions about whether the peg to the dollar remains appropriate, and therefore would be appropriate for the GCC Monetary Union.