GCC countries and the nexus between exchange rate and oil price: What wavelet decomposition reveals?

Abstract

We employ wavelet decomposition and nonlinear causality test to investigate the nexus between the real oil price and the real effective exchange rate in three GCC countries: Qatar, Saudi Arabia and UAE. We find strong evidence in favour of a feedback hypothesis in Qatar and UAE and of a neutrality hypothesis in Saudi Arabia. The first observation outcome means that Qatar and UAE should reinforce the downward effect of oil price on real exchange rate by improving diversification policy. The second one implies that the behaviour of Saudi Arabia as a price taker may allow it to maintain a quick recovery under oil shocks.