Country heterogeneity and long‐run determinants of inflation in the Gulf Arab states^†

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.JEL Codes: C32, C33, E31, E50, H30

Inflation Dynamics in Algeria

“…We define inflation dynamics as "a non transitory change in the value, trend and the continuity of inflation over time due to changes in the relative importance of the factors motivating the inflationary process" 5 . Basher and Elsamadisy (2012) investigates the main sources the sources and transmission of inflation in GCC countries over the period 1980-2008 and suggested that inflation in trading partners, money and the nominal effective exchange rate are affecting inflation in the short run and only money is affecting inflation in the long run. Kandil and Morsy (2009) examined the determinants of inflation in GCC countries for the period between 1970 and 2007 and found that inflation in trading partners is very important in affecting inflation, while in the long run public capital spending helps easing inflationary pressures and excess demand is an important determinant in the short run.…”

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“…Most of the studies that use money supplies as inflation predictor, such as those by [12][13][14][15][16][17][18], report a positive relationship between money supply and inflation. For instance, [12] found that higher money supply can prompt inflation.…”

Pre- versus post-crisis central banking in Qatar

“…As a result of higher inflation, Qatar's effective exchange rate appreciated over the [2005][2006][2007][2008], as depicted in Figure 3d. See Basher and Elsamadisy (2012) for an empirical analysis on the sources of inflation in GCC countries.…”