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Introduction
As early as 1945, twenty two Arab nations had planned a common currency to be called the "Arab Dinar" ([3] Kamar, 2004). That idea however, did not take root. For several countries within MENA, the group of Arab nations spanning the Middle East and North Africa, exchange rate management has largely been a difficult experience. Their experience has generally been one of a fixed peg but incompatible macroeconomic policies causing exchange rate misalignment, serious overvaluation, capital flight, balance of payments problems and currency crises. More recently, most MENA countries have made considerable progress in liberalization of trade/financial systems and the adoption of pro market monetary policies. These have ameliorated to some extent their perennial problems with exchange rates. Since, the introduction of a single European currency, the Euro, in January 1999, there has been much interest in the area of optimal and common currency areas (CCA). That it has worked relatively well over its first five years and is being well accepted has served to further this interest. The Euro's success aside, a number of external factors have led to renewed interest in CCA. Globalization is one. As countries and governments grapple with the challenges of globalization, the idea of a common currency becomes more palatable. Additionally, the frequency and the depth of recent currency crises have raised the question of whether maintaining individual national currencies and the attendant independent policies are worth the cost.
An optimum currency area (OCA) and CCA fall within the ambit of currency unions. An OCA, using [16] Mundell's (1961) definition is "a domain within which exchange rates are fixed." By this definition, a CCA would be a step further with the adoption of a single common currency among members of the currency union. Several structural preconditions have been cited as being necessary for an OCA. [16] Mundell (1961) argues that a high degree of factor mobility is an essential ingredient. [17] McKinnon (1963) cites trade intensity or integration as a precondition. [18] Kennen (1969) would examine regional production patterns for product diversification to determine if a region would be well suited for an OCA. Yet other literature on the configuration needed for a country to be a candidate of a currency union identify factors such as, similar levels...