Monetary Policy Transmission in the GCC Countries

By Ananthakrishnan Prasad, Raphael A Espinoza

May 1, 2012

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Ananthakrishnan Prasad, and Raphael A Espinoza. Monetary Policy Transmission in the GCC Countries, (USA: International Monetary Fund, 2012) accessed December 22, 2024

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.

Subject: Central bank policy rate, Deposit rates, Econometric analysis, Financial services, Interbank rates, Interest rate ceilings, Vector autoregression

Keywords: Central bank policy rate, Deposit rate, Deposit rates, Fed funds rate, Fixed exchange rate regime, GCC Y, Global, Interbank rate, Interbank rates, Interest rate ceilings, Interest rate pass-through, Lending rate, Monetary policy, Monetary policy shock, Panel VAR, Rate, Transmission mechanism, Vector autoregression, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/132
Stock No:

WPIEA2012132
ISBN:

9781475503685
ISSN:

1018-5941

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