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Moral Hazard in a Single Currency Union, the case of GCC

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He asserts that “ if the world can be divided into regions within each of which there is a factor mobility and between which there is factor immobility, then each of these regions should have a separate currency that fluctuates relative to all other currencies” (Mundell, 1961, pp. The mobility of the inputs should act as the adjusting instrument if any region experiences asymmetric shock. In the absence of these inputs, the overseas exchange rate elasticity is not anticipated to execute the stabilization role assigned to it while the changing unemployment rates and inflation in the diverse areas would dominate (Mundell, 1961).The GCC union refers to Cooperation for the Persian Gulf. It is a political and economic union. All these Arab countries border the Persian Gulf. Instability in the region and pressure from Iran necessitated the formation of this union. The pursuant gulf region is extremely endowed with gas and oil revenues. This makes the region one of the fastest developing regions in the world, (Mundell, 1961, pp. This economic and political pact proposal dates back to 1981. The GCC union was ratified in the year 1982. However, the plans and efforts towards the currency integration have been extremely slow. However, the single currency initiative among the member states of GCC gained momentum in the year 2001, (Goyal, 2004, p. This led to signing of a new economic agreement. The union aimed at having a monetary union by 2010. This was supposed to make economic integration happen with ease. The move had many potential benefits, (Darrat and Al-Shamsi, 2005, pp. However, this meant that they would have to lose the exchange rate mechanism together with their monetary policy. The major aim of the GCC union is to come up, and develop a standardized approach in terms of tourism, economy, single joint currency, trade and administration. There have been many studies that aimed at establishing the readiness of the member states of the GCC with regard to a single currency. A research by Laabas and Limam (2002) shows the fact that most of these states depend on oil makes it hard for them to integrate. This is because they do not have diversified trade activities happening between them. For the integration to be effective, there are fundamentals that must be addressed, (Goyal, 2004, p. These include the ability of the member states to do trade and come up with joint monetary policy that encourage
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preview essay on Moral Hazard in a Single Currency Union, the case of GCC
  • Pages: 23 (5750 words)
  • Document Type: Essay
  • Subject: Business
  • Level: Undergraduate
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