Exchange Rate Policy in the Gulf States.

An abstract is required. Recently, due to shocks in oil prices, many Gulf States have been pursued to adapt to the flexible exchange rate regimes because of rising inflationary pressures as well as bringing in more structural reforms into such economies in order to improve their long term sustainability. (Times, 2007). Further, many analysts are also indicating the recent movements in the oil price as one of the most critical reasons for bringing in the changes into the exchange rate regimes in GCC countries as most of the OPEC members believe that the mismanagement of US economy and weakening dollar against major currencies of the world is a cause of concerns as revenues continue to dwindle despite maintaining adequate supply in the market. (Feldman, 2008).

There are different foreign exchange regimes that are followed by countries across the world. However, a historical understanding of the process would further add up to the overall understanding of the issue. The issues of choosing a fixed exchange rate regime or floating exchange regime are one of the oldest debated policy issues which both public policymakers as well as monetary policymakers encounter with. Both the systems have their own merits and de-merits and both the regimes and combination of both as one can be beneficial under certain economic conditions. Thus the choice of having different exchange rate regimes largely depends upon the multitude of factors that combine produced the economic environment most conducive for such an exchange rate regime.

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The more modified form of the gold exchange standards was put in place during 1927 mostly due to the increase in the output of the world’s gold. The exchange rates were fixed against the gold due to its increasing convertibility as well as the willingness of most central banks to hold interest-bearing foreign exchange&nbsp.securities as an alternative to the overall gold.

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