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

  • Basher, Syed Abul
  • Elsamadisy, Elsayed Mousa

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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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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