The peace process between Israel and the Palestinians raises some interesting economic questions concerning integration between the West Bank, Gaza and Israel. In this paper we describe past and current arrangements between Israel, the occupied territories and Jordan, focusing particularly on trade and labour flows. We then compare the similarity of economic performance of the four regions, employing recent developments in the statistical analysis of macroeconomic data due to Blanchard and Quah (1989), which enable to extract the shocks to the economies. Our findings indicate that under the past and current economic relations, Israel, the West Bank and Gaza were closely integrated, whereas economic integration between the occupied territories and Jordan was much weaker. Based on these past circumstances, the (imposed) monetary union between Israel and the Palestinian Economy was warranted. However, optimal monetary arrangements in the future will depend on the extent of changes in real flows and on a satisfactory settlement of the seigniorage issue.

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