Studies on monetary policy and the exchange rate

This dissertation comprises two parts. Part I examines whether a monetary union is a viable option for the GCC region, and includes an overview of the GCC economics, an optimum currency area literature review and an original empirical study. In this study, I utilize structural vector autoregressions to extract supply and demand shocks using the methodology developed by Blanchard and Quah. Unlike other studies that use the same methodology, a classical aggregate supply/aggregate demand theory is adjusted to be consistent with the role of oil in the supply and demand sides of these oil-based economies. I also account for the effects of monetary policy on demand, and that too is original to the GCC Literature. I find that supply and demand shocks are symmetric across Bahrain, Kuwait, Qatar, Saudi Arabia, and the UAE, suggesting that a monetary union is a viable option for the GCC minus Oman. In part II, I examine the impact of monetary policy during a financial crisis using the 1997-98 Hong Kong (HK) crisis episode. Specifically, two opposing views are considered. The traditional position prescribes a significant rise in the interest rate to increase the desire to hold the currency, thus deterring further speculation. Conversely, the revisionist view favors expansionary monetary policy, contending that raising interest rates during a financial crisis causes widespread domestic bankruptcies, inducing greater loss of confidence and further depreciation of the currency. In this part, I conduct an analysis of the HK monetary structure, a literature review and an original empirical study. In this study, I use the Girton and Roper (1977) derivation of the exchange market pressure treasure to construct VARs that test for consistency with the revisionist view, as theorized by Furman et al. (1998). The results are consistent with the revisionist theory.