The Integration of Financial Markets in GCC Countries

Abstract

The real interest parity (RIP) condition states that the interest rate differential between two economies is equivalent to the differential between the forward exchange rate and the spot exchange rate. This study examines the integration of financial markets in the GCC countries by verifying the validity of RIP in their economies. Using univariate and different panel unit root tests, we find evidence supporting the RIP theory, which indicates that the financial markets in these countries are well integrated and that the adoption of a common currency would be relatively easy. JEL classification: F21; F36; C23 Keywords: Real Interest Parity, GCC Countries, Panel Unit Root Tests, Monetary Union