Setting the Stage for a National Currency in the West Bank and Gaza

This paper sheds light on the quantitative behavioral responses of key economic variables in the Palestinian economy in the face of major economic shocks and draws implications for the choice of an exchange rate regime should a decision be taken to introduce a national currency. Time-series regression analysis shows that (i) wages and prices are flexible in the face of various shocks; (ii) the real wage appears rigid in the face of various shocks and increases despite higher unemployment; (iii) an appreciation of the new Israeli Sheqalim real effective exchange rate decreases exports and imports; and (iv) money demand appears stable in the face of exchange rate shocks. Although a fixed exchange rate system may initially be desirable to establish credibility of the new currency, some flexibility of the exchange rate is desirable over time.Exchange rate regimes;West Bank and Gaza;Currency substitution;exchange rate, inflation, wage inflation, price inflation, exchange rate regime, fixed exchange rate, exchange rate system, real wages, real effective exchange rate, effective exchange rate, monetary policy, fixed exchange rate system, exchange rate flexibility, foreign exchange, exchange rates, exchange rate fluctuations, flexible exchange rate, fixed exchange rate regime, relative price, exchange rate shocks, dollar exchange rate, price stability, euro exchange rate, flexible exchange rate system, exchange rate management, inflation rates, exchange rate rigidity, relative prices, real national income, nominal interest rate, exchange rate stability, inflationary expectations, exchange rate arrangements, exchange rate increases, exchange rate level, basket of currencies, aggregate demand, floating exchange rate regime, nominal exchange rate, high inflation, rate of inflation, floating exchange rate, history of exchange rate, foreign exchange market, inflation targeting, money supply, flexible exchange rate regime, relative exchange rates, exchange reserves, east asian miracle, exchange arrangements, foreign exchange reserves, exchange auctions, high-frequency exchange rates, foreign currency, real exchange rate, exchange rate risk, fixed exchange rates, foreign exchange auctions