Monetary Policy Transmission in the GCC Countries

31 Pages Posted: 9 Aug 2012

See all articles by Raphael A. Espinoza

Raphael A. Espinoza

International Monetary Fund (IMF)

A. Prasad

International Monetary Fund (IMF)

Date Written: May 2012


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.

Keywords: Transmission Mechanism, Fixed Exchange Rate Regime, Interest Rate Pass-through, Panel Var, Economic Models, Interest Rates, Monetary Transmission Mechanism

JEL Classification: E52, E58

Suggested Citation

Espinoza, Raphael A. and Prasad, Ananthakrishnan, Monetary Policy Transmission in the GCC Countries (May 2012). IMF Working Paper No. 12/132, Available at SSRN:

Raphael A. Espinoza (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States


Ananthakrishnan Prasad

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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