SOAS Research Online

Abstract

This thesis consists of four independent chapters, each of which takes a distinct approach to exploring the monetary and exchange rate arrangement bridging the Palestinian and the Israeli economies. In light of the distinctive attribute of ‘shekelisation’ - that the anchor currency is, above all, the national currency of one’s political rival – the first chapter aims at characterising shekelisation as both an economic phenomenon and a political process, and at providing a comprehensive assessment of its implications. To do so, the analysis accounts for the conceptual roots and analytical tools of the heterodox critique to the dominant theory of money. The second chapter combines monetary and political economics, for evaluating the convenience of shekelisation in a small open economy with sticky prices and subjected to economic sanctions in the output-inflation space. Noticeably, the cardinal contribution of this chapter is theoretical, in that it aims at extending the conventional New Keynesian analysis of exchange rate policy as to include the role of political contention between the currency area’s members. In spite of the paucity of the data, the subsequent chapter is dedicated to the empirical assessment of the theoretical model’s findings. The Vector Error Correction model and other empirical exercises confirm the hypotheses that shekelisation is not an optimal solution for the economy of the territories occupied by Israel in 1967, in that it does not serve as an absorber of real fluctuations nor as a strong catalyst of inflation stability, while translating political crises into economic downturns. Finally, the last chapter makes use of Bayesian game theory modelling techniques to provide an alternative and plainly political perspective on the failure of the economic peace process, as well as to unveil conditions that will favour its compliance, even in presence of adverse political circumstances.