Does Monetary Policy Respond Differently to Oil Price Shocks? New Evidence from The Gulf Cooperation Council Countries

This paper investigates the role of oil supply and demand shocks in monetary policy stance among the Gulf Cooperation Council (GCC) countries using a panel vector autoregressive (PVAR) framework and annual panel data over the period 1980-2019. The impulse response functions show that under the symmetric definition of oil shocks (‘all’ shocks), the inflation shock leads to a contractionary monetary policy in GCC countries. Nevertheless, based on asymmetric supply-driven and demand-driven specifications, we find clear evidence of a differentiated reaction of monetary policy to asymmetric oil-induced inflation shocks. Following an oil demand-induced inflation shock, the monetary policy stance remains neutral or becomes accommodative (Dovish). On the other side, the real interest rate in GCC countries increases in response to the anticipated oil supply-induced inflation shock, suggesting that monetary policy stance may become contractionary (Hawkish). With regard to policy implications, as previously experienced, the monetary policy stance in GCC countries must be sensitive to the source of the oil-induced inflation shocks.