Lost in Transmission? The Effectiveness of Monetary Policy Transmission Channels in the GCC Countries

Serhan Cevik,Katerina Teksoz

doi:10.2139/ssrn.2169737

Abstract

This paper empirically investigates the effectiveness of monetary policy transmission in the Gulf Cooperation Council (GCC) countries using a structural vector autoregressive model. The results indicate that the interest rate and bank lending channels are relatively effective in influencing non-hydrocarbon output and consumer prices, while the exchange rate channel does not appear to play an important role as a monetary transmission mechanism because of the pegged exchange rate regimes. The empirical analysis suggests that policy measures and structural reforms - strengthening financial intermediation and facilitating the development of liquid domestic capital markets - would advance the effectiveness of monetary transmission mechanisms in the GCC countries.

Highlights

Evaluating the efficacy of monetary transmission channels provides central banks with pertinent insight for better decision-making
The results presented in this paper indicate that the interest rate channel has a significant influence on real non-hydrocarbon output and the consumer price index (CPI), while the exchange rate channel does not appear to have a meaningful role in monetary transmission
In line with Bernanke and Blinder (1992) and Sims (1992), we investigate the importance of various monetary policy transmission channels, using a structural vector autoregressive (SVAR) model, and obtain impulse response functions implied by the economic theory

Summary

Introduction

Evaluating the efficacy of monetary transmission channels provides central banks with pertinent insight for better decision-making. The primary objective of monetary policy in the Gulf Cooperation Council (GCC) countries is to maintain the pegged exchange rate regime.. With exchange rates pegged to the U.S dollar, the GCC central banks have limited scope for discretionary monetary policy; the primary responsibility for macroeconomic stabilization and demand management falls on fiscal institutions and, to lesser extent, macroprudential regulatory measures. Since its establishment in 1981 as a regional cooperation platform, the GCC has moved toward closer economic and financial integration, aiming to form a monetary union. This objective alone requires a better understanding of the monetary transmission process and requires the development of instruments that can reinforce the efficacy of monetary policy transmission.

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