Alternative currency arrangements for Palestine

Comparable economies to that of a new Palestinian state have mostly opted for a pegged exchange rate regime, but generally not a currency union or a currency board. The issue of a new Palestinian currency would bring only relatively small steady state seigniorage, but the transitional seigniorage gains would be more significant. Gravity models suggest the new state would do up to a third of its trade with the Eurozone, and rather less with Israel. Of the possible anchor currencies the US dollar and the euro are stable and suitable, but the Israeli shekel and the Jordanian dinar are not. Given the likely long run redirection of trade, the long run goal should be an (adjustable) peg to the euro, and this should be approached via the introduction of a new currency under a currency board, with the currency pegged initially to the shekel and later to the euro. JEL classification: E52, E58, F41 I am grateful to Samar Maziad for research assistance on sections 2 and 5 of the paper. Contact details: David Cobham, Department of Economics, University of St Andrews, St Andrews, KY16 9JT, Scotland, UK; tel + 1334 462424; email [email protected]