Monetary Policy Transmission in the GCC Countries
IMF Working Papers, May 1, 2012
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Bibliographic details
- Authors: Ananthakrishnan Prasad, Raphael A Espinoza
- Published: May 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475503685.001
Key findings
- 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.
- 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.
- Continued efforts to develop the domestic financial markets will increase interest rate pass-through and strengthen monetary policy transmission.
Econometric evidence and transmission dynamics
- A panel vector auto regression (panel VAR) model suggests that U.S. monetary policy has a strong and statistically significant impact on:
- broad money,
- non-oil activity,
- inflation
in the GCC region.
- Unanticipated shocks to broad money:
- affect prices,
- do not stimulate growth.
Analysis of constraints on monetary independence
- Open capital accounts combined with a pegged (or nearly-pegged) exchange rate limit the scope for independent domestic monetary policy in the GCC.
- Shallow domestic money markets reduce the effectiveness of policy-rate changes in transmitting to retail lending and deposit rates.
- The operational practices of GCC central banks contribute to low interest-rate pass-through.
Policy instruments observed
- Central bank policy rates (with limited pass-through to retail rates).
- Reserve requirements.
- Loan-to-deposit ratios.
- Other macroprudential tools aimed at managing liquidity and credit conditions.
Policy implications and recommendations
- Deepening domestic financial markets is essential to:
- increase interest-rate pass-through from policy rates to retail rates,
- strengthen overall monetary policy transmission.
- Given the strong external influence of U.S. monetary policy on GCC broad money, non-oil activity, and inflation, policymakers should:
- account for U.S. monetary developments when setting macroeconomic and financial-stability policies,
- continue using reserve requirements, loan-to-deposit ratios, and macroprudential tools to manage domestic liquidity and credit conditions under exchange rate pegs.
Monetary Policy Transmission in the GCC Countries, IMF Working Papers 2012/132