Is the Gulf Cooperation Council an Optimum Currency Area?

This article applies the theory of Generalized Purchasing Power Parity (G-PPP) to assess the potential for an optimum currency area (OCA) for the Gulf Cooperation Council (GCC) countries over the period 1973-2009. Utilizing a multivariate cointegration procedure that allows for up to two predetermined structural breaks, the results suggest that the GCC countries could form an OCA since macroeconomic conditions are in favor of forming an OCA, i.e., real exchange rates share common trends and the parameter stability test indicates that the G-PPP relationship has been stable for the period analyzed. Moreover, the results suggest that the withdrawal of Oman and/or United Arab Emirates (UAE) from the union has no impact on forming the union. However, based on other OCA criteria, the results suggest that the OCA may be challenged.