Exchange Rate Pass-Through to Domestic Inflation in Gulf Co-Operation Council Countries

Abstract

This paper provides estimates of the exchange rate pass-through to the quarterly Consumer Price Index (CPI) in five Gulf Co-operation Council (GCC) countries (Bahrain, Kuwait, Qatar, Oman, and Saudi Arabia) during the period 1999q1 to 2009q4. The degree of pass-through varies significantly across the five GCC countries. Consumer prices in Qatar, Saudi Arabia, and Bahrain show higher and faster response to exchange rate fluctuations as opposed to the findings of Kuwait and Oman. In all cases, over a one-and-half year span, the pass-through is complete for Qatar only. More interestingly, and despite the fact that the euro area is the major import partner to GCC countries, the empirical results revealed that the Japanese Yen/US dollar exchange rate matters more for CPI inflation in GCC countries than Sterling Pound/US dollar or Euro/US dollar. Variations in estimated pass-through are related to nominal exchange rate volatility, import openness, retail distribution channels, and subsidization programs by respective governments. These results have important policy implications given the GCC countries’ movement toward a common market and their efforts to achieve greater monetary policy coordination. In addition, the paper has policy implications for firms exporting to the GCC region.