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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.

Suggested Citation

  • Basher, Syed Abul & Elsamadisy, Elsayed Mousa, 2010. "Country Heterogeneity and Long-Run Determinants of Inflation in the Gulf Arab States," MPRA Paper 27348, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:27348
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    Cited by:

    1. 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, vol. 29(6), pages 2205-2221.
    2. 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, vol. 27(C), pages 298-317.
    3. Kamiar Mohaddes & Oral H. Williams, 2013. "Inflation Differentials In The Gcc: Does The Oil Cycle Matter?," Middle East Development Journal (MEDJ), World Scientific Publishing Co. Pte. Ltd., vol. 5(02), pages 1-23.
    4. Syed Basher, 2015. "Regional initiative in the Gulf Arab States: the search for a common currency," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing, vol. 8(2), pages 185-202, June.
    5. Hossain, Akhand Akhtar, 2014. "Empirical relationships among money, output and consumer prices in nine Muslim-majority countries," Journal of Asian Economics, Elsevier, vol. 31, pages 42-56.
    6. 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.
    7. Elsamadisy, Elsayed Mousa & Alkhater, Khalid Rashid & Basher, Syed Abul, 2014. "Pre- versus post-crisis central banking in Qatar," Journal of Policy Modeling, Elsevier, vol. 36(2), pages 330-352.

    More about this item

    Keywords

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

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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