The MENA Region - an Optimal Currency Area? Evaluating its Stability by Taylor-Rule derived Stress Tests

The introduction of the European currency union and the EURO as common currency was an unprecedented experiment in monetary history. Not surprisingly, it has attracted a lot of attention to the concept of monetary unions, and it has the potential to be a role model for other parts of the world. This paper aims at identifying potential currency unions in the MENA region. To assess their sustainability, the optimal interest rates of the members of each potential union is estimated and used to calculate a stress level index. The sample used in this study consists of eleven countries where Taylor rates were calculated using data from 1998 to 2008. The stress test results provide a clear result: Two monetary sub-unions, namely the Saudi Arabia - Kuwait union and the Mashreq union (Jordan, Lebanon, Syria, and Palestine), are found to have relatively low stress levels and high benefits from a common currency. In contrast, a large MENA union would suffer from very high stress levels and only modest advantages of a common currency.