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Monetary Policy Transmission in the GCC Countries

  • Ananthakrishnan Prasad
  • Raphael A. Espinoza

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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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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  1. Raphael A. Espinoza & Oral Williams & Ananthakrishnan Prasad, 2010. "Regional Financial Integration in the GCC," IMF Working Papers 10/90, International Monetary Fund.
  2. 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.
  3. 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.
  4. 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.
  5. Claudia Kwapil & Johann Scharler, 2007. "Interest Rate Pass-Through, Monetary Policy Rules and Macroeconomic Stability," Money Macro and Finance (MMF) Research Group Conference 2006 65, Money Macro and Finance Research Group.
  6. Hanson, Michael S., 2004. "The "price puzzle" reconsidered," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1385-1413, October.
  7. International Monetary Fund, 2011. "How Strong Are Fiscal Multipliers in the GCC? An Empirical Investigation," IMF Working Papers 11/61, International Monetary Fund.
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