Monetary Policy Transmission in the GCC Countries

Author/Editor: Ananthakrishnan Prasad ; Raphael A. Espinoza
Publication Date: May 01, 2012
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: 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.
Series: Working Paper No. 12/132
Subject(s): Economic models | Interest rates | Monetary transmission mechanism

Author's Keyword(s): Transmission mechanism | Fixed exchange rate regime | interest rate pass-through | panel VAR
Publication Date: May 01, 2012
ISBN/ISSN: 9781475503685/1018-5941 Format: Paper
Stock No: WPIEA2012132 Pages: 29
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