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Determinants Of Inflation In Gcc

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  • MAGDA KANDIL

    ()
    (Egyptian Center for Economic Studies (ECES), Egypt)

  • HANAN MORSY

    (International Monetary Fund (IMF), USA)

Abstract

Inflationary pressures that had heightened in the oil-rich Gulf Cooperation Council (GCC) since 2003 have moderated in recent times. This paper studies the determinants of inflation in GCC, using an empirical model that includes domestic and external factors. Inflation in major trading partners appears to be the most relevant foreign factor. In addition, oil revenues have reinforced inflationary pressures through higher growth of credit and aggregate spending. In the short-run, binding capacity constraints also explain higher inflation in the face of higher government spending. Nonetheless, by targeting supply-side bottlenecks, the increase in public spending on capital is easing capacity constraints and will ultimately help to moderate price inflation. The results highlight the need to mitigate the pro-cyclical stance of fiscal policy to avoid exacerbating cyclical swings. Moreover, prioritizing fiscal spending to address structural bottlenecks should take priority to avoid inflationary pressures and ease capacity constraints towards reducing overdependence on oil activity.

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Bibliographic Info

Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Middle East Development Journal.

Volume (Year): 03 (2011)
Issue (Month): 02 ()
Pages: 141-158

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Handle: RePEc:wsi:medjxx:v:03:y:2011:i:02:p:141-158

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Keywords: Inflation; external shocks; domestic policies; exchange rate pass-through;

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References

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  1. Calista Cheung, 2009. "Are Commodity Prices Useful Leading Indicators of Inflation?," Discussion Papers 09-5, Bank of Canada.
  2. Hesham Alogeel & Maher Hasan, 2008. "Understanding the Inflationary Process in the GCC Region," IMF Working Papers 08/193, International Monetary Fund.
  3. O. Liu & Olumuyiwa Adedeji, 2000. "Determinants of Inflation in the Islamic Republic of Iran," IMF Working Papers 00/127, International Monetary Fund.
  4. Hofmann, Boris, 2006. "Do monetary indicators (still) predict euro area inflation?," Discussion Paper Series 1: Economic Studies 2006,18, Deutsche Bundesbank, Research Centre.
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  6. Juselius, Katarina, 1992. "Domestic and foreign effects on prices in an open economy: The case of Denmark," Journal of Policy Modeling, Elsevier, vol. 14(4), pages 401-428, August.
  7. Kandil, Magda & Mirzaie, Aghdas, 2002. "Exchange rate fluctuations and disaggregated economic activity in the US: theory and evidence," Journal of International Money and Finance, Elsevier, vol. 21(1), pages 1-31, February.
  8. C. John McDermott & David T. Coe, 1996. "Does the Gap Model Work in Asia?," IMF Working Papers 96/69, International Monetary Fund.
  9. Marta Campillo & Jeffrey A. Miron, 1996. "Why Does Inflation Differ Across Countries?," NBER Working Papers 5540, National Bureau of Economic Research, Inc.
  10. Bonato Leo, 2008. "Money and Inflation in the Islamic Republic of Iran," Review of Middle East Economics and Finance, De Gruyter, vol. 4(1), pages 41-58, January.
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  12. Mangal Goswami & Oya Celasun, 2002. "An Analysis of Money Demand and Inflation in the Islamic Republic of Iran," IMF Working Papers 02/205, International Monetary Fund.
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Cited by:
  1. Marzovilla, Olga & Mele, Marco, 2010. "From dollar peg to basket peg:the experience of Kuwait in view of the GCC monetary unification," MPRA Paper 21605, University Library of Munich, Germany.
  2. Basher, Syed Abul & Elsamadisy, Elsayed Mousa, 2010. "Country Heterogeneity and Long-Run Determinants of Inflation in the Gulf Arab States," MPRA Paper 27348, University Library of Munich, Germany.
  3. Quint, Dominic, 2014. "Is it really more dispersed? Measuring and comparing the stress from the common monetary policy in the euro area," Discussion Papers 2014/13, Free University Berlin, School of Business & Economics.
  4. Tidiane Kinda, 2011. "Modeling Inflation in Chad," IMF Working Papers 11/57, International Monetary Fund.
  5. Oral Williams & Kamiar Mohaddes, 2011. "Inflation Differentials in the GCC," IMF Working Papers 11/294, International Monetary Fund.
  6. Moretti, Laura, 2014. "The determinants of inflation differentials in the euro area," CFS Working Paper Series 451, Center for Financial Studies (CFS).
  7. D'Adamo, Gaetano & Rovelli, Riccardo, 2013. "Labor Market Institutions and the Response of Inflation to Macro Shocks in the EU: A Two-Sector Analysis," IZA Discussion Papers 7616, Institute for the Study of Labor (IZA).
  8. Alpaslan, Baris & Demirel, Baki, 2014. "Exchange Rate Pass-Through Effect on Prices and Inflation Targeting: A Comparison of Emerging Market Economies," MPRA Paper 53726, University Library of Munich, Germany.
  9. Kim, Won Joong & Hammoudeh, Shawkat, 2013. "Impacts of global and domestic shocks on inflation and economic growth for actual and potential GCC member countries," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 298-317.
  10. Marzovilla, Olga, 2010. "Impact of global economic imbalance on migrant workers and economies of the Gulf Cooperation Council," MPRA Paper 24210, University Library of Munich, Germany.

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