THE ABSENCE OF A PALESTINIAN NATIONAL CURRENCY: CONSEQUENCES AND SOME CHALLENGES

As Palestine is a challenging case study from political aspect, it is also a challenging case study from economic aspect. Since 1948 and in the aftermath of the establishment of Israel and as a result of Paris protocol, the Palestinian territories have been forced to grow dependent on trade, employment, and other important aspects on the Israeli economy. Moreover, the absence of own Palestinian currency and the existence of three currencies in circulation (New Israeli shekel (NIS), US Dollar (US$), and Jordanian Dinar (JD)) hampers the ability of Palestinian Monetary Authority to use monetary and exchange rate policies, which are needed to stimulate the growth and stabilize inflation, unemployment, and current account. It also deprives the country from the gains of money creation (seigniorage) which represents a source of revenue that it can be used to finance government spending. In addition, the circulation of three currencies makes the Palestinian economy highly vulnerable to the volatility of exchange rates of these currencies. This gives evidence that Palestine is a noteworthy case study. This thesis consists of three chapters that investigate the consequences of the absence seigniorage on Palestinian national currency, as a source of revenue that can be used to finance the government spending, and on the inflation. The Israeli currency (New Israeli Shekel) is used in daily transactions in the Palestinian market and to construct the Palestinian Consumer Price Index (CPI) used to calculate inflation. Therefore, understanding the relationship between prices in Palestine and Israel and examining whether inflation rates in the two economies are converging or not is one of keys to adopt an appropriate policy response, especially the choice of exchange rate regimes in Palestine, which is examined in the third chapter of this thesis. More precisely, the third chapter empirically examines and predicts the exchange rate regime choice in Palestine. In the absence of a national currency and in consideration of the ongoing efforts of the Palestinian government to issue a national currency, it is important for policy makers to address seigniorage as an additional source of income that it can be used to finance the government spending and it is vital for them to understand the behavior of currency demand, its composition structure, and its evolution to ensure an adequate supply of currency to meet demand conditions if a decision were taken to issue a Palestinian currency. Moreover, because of the high dependence of Palestinian economy on the Israeli economy in trade, employment, and many other important aspects and, due to the geographic, social, and demographic considerations between Palestine and Jordan and as a result of circulation of the Israeli currency (New Israeli Shekel) as well as the Jordanian currency (Jordanian Dinar) in Palestine, it is crucial to understand the size and the sources of inflation differentials between Israel, Palestine, and Jordan, since the appropriate decision related to the introduction of Palestinian national currency and then the adoption of appropriate exchange rate regime choice (such as the formation of the currency board with Jordan as what the literature on the choice of exchange rate regime if a Palestinian currency were issued has suggested) may differ accordingly. Further, this thesis, unlike previous studies, predicts empirically the appropriate choice of an exchange rate regime if a decision were taken to issue a Palestinian national currency by determining whether Palestine has the characteristics of fixed, or soft, or flexible exchange rate regimes.