Asymmetric import cost pass-through in GCC countries: Evidence from nonlinear panel analysis

Abstract

This paper investigates the asymmetric impacts of import costs on inflation in GCC countries. We utilize data from GCC countries and their trading partners over the period of 1990:Q1-2014:Q4 to construct a new import cost index that captures changes in both foreign prices and exchange rates. The results indicate that inflation responses to positive shocks in import costs are larger than their responses to negative shocks, confirming the presence of an asymmetric impact of import costs on inflation. This result holds only when the external shocks occur in an Asian or North American country. Furthermore, the results indicate that shocks in import cost pass-through into inflation occur only in periods of economic expansion. According to these results, monetary policy makers should take into account the nature of the shock, the geographical origin of the shock and the state of the domestic business cycle when the shock occurs.