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Country Heterogeneity and Long-Run Determinants of Inflation in the Gulf Arab States

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  • Basher, Syed Abul
  • Elsamadisy, Elsayed Mousa

Abstract

Applying nonstationary panel data econometric methods, this paper analyzes the major sources and transmission of inflation in the Gulf Cooperation Council (GCC) countries over the 1980-2008 period. We argue that, in GCC countries, money is essentially demand determined, so that the high collinearity between money and aggregate demand indicators such as non-hydrocarbon output is expected and should be dealt with accordingly. Several important results emerge from the analysis. First, the money supply stands out as a significant determinant of inflation both in short- and long-run. Both foreign prices and the nominal effective exchange rate are shown to be more successful in explaining inflation in the long-run than the short-run. The half-life of the speed of adjustment reveals that it takes about 2.9 years for 50% of a shock to the long-run equilibrium to dissipate. An implication of our results is the case it makes for more sovereign monetary policies in GCC countries.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27348.

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Date of creation: 09 Dec 2010
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Handle: RePEc:pra:mprapa:27348

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Keywords: Inflation; Monetary policy; Fiscal policy; Exchange rates; Oil price; Panel data.;

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Citations

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Cited by:
  1. Oral Williams & Kamiar Mohaddes, 2011. "Inflation Differentials in the GCC," IMF Working Papers 11/294, International Monetary Fund.
  2. Elsamadisy, Elsayed Mousa & Alkhater, Khalid Rashid & Basher, Syed Abul, 2013. "Pre- versus Post-Crisis Central Banking in Qatar," MPRA Paper 45310, University Library of Munich, Germany.
  3. Syed Abul, Basher, 2013. "Regional Initiative in the Gulf Arab States: The Search for a Common Currency," MPRA Paper 46486, University Library of Munich, Germany.
  4. 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, Elsevier, vol. 27(C), pages 298-317.
  5. Naz, Farah & Mohsin, Asma & Zaman, Khalid, 2012. "Exchange rate pass-through in to inflation: New insights in to the cointegration relationship from Pakistan," Economic Modelling, Elsevier, Elsevier, vol. 29(6), pages 2205-2221.

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