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Monetary Policy Transmission in the GCC Countries

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Author Info

  • Ananthakrishnan Prasad
  • Raphael A. Espinoza

Abstract

The GCC countries maintain a policy of open capital accounts and a pegged (or nearly-pegged) exchange rate, thereby reducing their freedom to run an independent monetary policy. This paper shows, however, that the pass-through of policy rates to retail rates is on the low side, reflecting the shallowness of money markets and the manner in which GCC central banks operate. In addition to policy rates, the GCC monetary authorities use reserve requirements, loan-to-deposit ratios, and other macroprudential tools to affect liquidity and credit. Nonetheless, a panel vector auto regression model suggests that U.S. monetary policy has a strong and statistically significant impact on broad money, non-oil activity, and inflation in the GCC region. Unanticipated shocks to broad money also affect prices but do not stimulate growth. Continued efforts to develop the domestic financial markets will increase interest rate pass-through and strengthen monetary policy transmission.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/132.

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Length: 29
Date of creation: 01 May 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/132

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Related research

Keywords: Economic models; Interest rates; Monetary transmission mechanism; monetary policy; inflation; central bank; monetary fund; monetary shocks; monetary transmission; monetary authorities; reserve requirements; price stability; money markets; monetary aggregates; monetary aggregate; discount rate; monetary economics; money supply; aggregate demand; inflationary pressures; inflationary expectations; annual inflation; open market operations; real interest rates; monetary policy operations; macroeconomic stability; monetary policy decisions; money growth; monetary policy independence; increase in inflation; monetary policy rules; lower inflation; expansionary monetary policy; transmission of monetary policy; independent monetary policy; monetary independence; high interest rates; contractionary monetary policy; increase in interest rates;

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References

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  1. Espinoza, Raphael & Prasad, Ananthakrishnan & Williams, Oral, 2011. "Regional financial integration in the GCC," Emerging Markets Review, Elsevier, vol. 12(4), pages 354-370.
  2. Claudia Kwapil & Johann Scharler, 2007. "Interest Rate Pass-Through, Monetary Policy Rules and Macroeconomic Stability," Working Papers 118, Oesterreichische Nationalbank (Austrian Central Bank).
  3. de Bondt, Gabe & Mojon, BenoƮt & Valla, Natacha, 2005. "Term structure and the sluggishness of retail bank interest rates in euro area countries," Working Paper Series 0518, European Central Bank.
  4. Paul Mizen & Boris Hofmann, 2002. "Base rate pass-through: evidence from banks' and building societies' retail rates," Bank of England working papers 170, Bank of England.
  5. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers 1011, Cowles Foundation for Research in Economics, Yale University.
  6. International Monetary Fund, 2011. "How Strong Are Fiscal Multipliers in the GCC? An Empirical Investigation," IMF Working Papers 11/61, International Monetary Fund.
  7. Hanson, Michael S., 2004. "The "price puzzle" reconsidered," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1385-1413, October.
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Cited by:
  1. Syed Basher & Stefano Fachin, 2012. "Investigating Long-Run Demand for Broad Money in the Gulf Arab Countries," DSS Empirical Economics and Econometrics Working Papers Series 2012/6, Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome.

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