Currencies of the GCC countries have long been unofficially but effectively pegged to the US dollar. Since 2003, the GCC countries have formally started pegging their currencies to the US dollar as a first step towards a proposed Gulf monetary union. The prevailing dollar peg and the absence of any significant current and capital account restrictions led some to believe that these countries have lost monetary independence. Contrary to this belief, the paper presents evidence that interest rates of the GCC countries did not converge to the interest rates of the US implying that the assets of the GCC countries are not perfect substitutes to the US assets. This imperfect asset substitutability has allowed the GCC countries to manoeuver their monetary policies and the central banks of the GCC countries have had some control over their money growth rates by sterilising the changes in international reserves. Results indicate that the monetary authorities of these countries used domestic credit policy to attain some domestic policy objective while engaging in sterilised foreign exchange intervention. This result implies that the proposed GCC central bank should be able to maintain the monetary independence as a group and can reap the benefit of monetary efficiency of the proposed Gulf Monetary Union.