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Country heterogeneity and long-run determinants of inflation in the Gulf Arab states

  • Syed Abul Basher
  • Elsayed Mousa Elsamadisy

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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Article provided by Organization of the Petroleum Exporting Countries in its journal OPEC Energy Review.

Volume (Year): 36 (2012)
Issue (Month): 2 (06)
Pages: 170-203

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Handle: RePEc:bla:opecrv:v:36:y:2012:i:2:p:170-203
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