Marco-Economic Linkages Between GCC and G7 Countries

One of the consequences of globalization is the increased vulnerability of small nations to the events happening in the advanced world. This study estimates the macro-economic linkages between the GCC and the G7 countries. A small model has been developed with only seven key variables. Four of these correspond to the GCC countries, namely their GDP, exports, imports and prices. The other three variables are the world oil prices, GDP and the prices (consumer price index) of the G7 countries. Three versions of the model have been estimated. They include a standard Vector Auto Regression (VAR), a Vector Error Correction Model (VECM) and a structural Vector Auto Regression model (SVAR), in which a Keynsian type structural model is used along with the VAR to avoid contemporaneous recursivity implied in a standard VAR. The results indicate a close dependence of all the GCC variables on the other three variables. While the degree of dependence changes across the three models, the qualitative conclusion remains the same, namely, that much of the variance in the performance of the GCC countries is explainable in terms of the variance in the other three variables which correspond to the industrialized world. The results corresponding to SVAR are sensitive to the specification of the structural model underlying SVAR. The results based on the VECM version indicate much stronger linkages than other versions and are more consistent with common sense.