Snip .. The dollar peg provides the nominal anchor for monetary policy for all GCC countries (other than Kuwait), but the monetary authorities in the region employ a variety of instruments to influence liquidity conditions.2 As the peg to the U.S. dollar restricts the independence of monetary policy, macroeconomic management mostly relies on fiscal policy, prudential regulation, and various controls to achieve the desired balance between price stability and growth.
The pegged exchange rate regime provided certainty about future exchange rates and was overall successful in anchoring inflationary expectations at low levels.
Nevertheless, the GCC monetary authorities conduct monetary policy and manage short-term liquidity conditions through open market operations and standing facilities, while using liquidity and reserve requirements,long-term government bonds, and macroprudential instruments to manage structural liquidity conditions.
In light of the openness of the GCC capital accounts, it would be reasonable to assume these operations have a limited impact on interest rates, as we would expect interest rates to converge quickly toward U.S. nominal interest rates. However, in several instances, interest rates in GCC countries have deviated vis-à-vis U.S. rates
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May 21, 2012
Monetary Policy Transmission in the GCC Countries
Summary: The GCC countries maintain a policy of open capital accounts and a pegged (or nearly-pegged) exchange rate, thereby reducing their freedom to run an independent monetary policy.
This paper shows, however, that the pass-through of policy rates to retail rates is on the low side, reflecting the shallowness of money markets and the manner in which GCC central banks operate. In addition to policy rates, the GCC monetary authorities use reserve requirements, loan-to-deposit ratios, and other macroprudential tools to affect liquidity and credit.
Nonetheless, a panel vector auto regression model suggests that U.S. monetary policy has a strong and statistically significant impact on broad money, non-oil activity, and inflation in the GCC region.
Unanticipated shocks to broad money also affect prices but do not stimulate growth. Continued efforts to develop the domestic financial markets will increase interest rate pass-through and strengthen monetary policy transmission.
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