Al-Mutairi, Naief, 1995, “Examining the causes of inflation in Kuwait: an application of a vector autoregression model”, OPEC Review.
Al Raisi, Ali, and Sitikantha Pattanaik, 2003, “Pass-Through of Exchange Rate Changes to Domestic Prices in Oman,” Central Bank of Oman Occasional Paper No. 2005–1.
Burstein, Ariel, Joao Neves, and Sergio Rebelo, 2003, “Distribution Costs and Real Exchange Rate Dynamics during Exchange-Rate-Based Stabilizations.” Journal of Monetary Economics 50 (September) pp. 1189-1214.
Burstein, Ariel, Martin Eichenbaum, and Sergio Rebelo, 2007, “Modeling Exchange Rate Pass-through after Large Devaluations,” Journal of Monetary Economics, Vol. 54 (March), pp. 346–68.
Campa, José Manuel, and Linda Goldberg, 2005, “Exchange Rate Pass-through into Import Prices,” Review of Economics and Statistics, Vol. 87 (November), pp. 679–90.
Campa, José Manuel, and Linda Goldberg, 2006, “Distribution Margins, Imported Inputs, and the Insensitivity of the CPI to Exchange Rates” Federal Reserve Bank of New York.
Cunningham, Alastair, and Andrew Haldane, 2000, “The Monetary Transmission Mechanism in the United Kingdom: Pass-Through and Policy Rules”, Central Bank of Chile Working Paper No. 83. Santiago: Central Bank of Chile.
Darrat, Ali, 1985, “The Monetary Explanation of Inflation: The Experience of three Major OPEC Economies,” Journal of Economics and Business, Vol. 37, pp. 209–21.
De Brouwer, Gordon and Neil Ericsson, 1998, “Modeling Inflation in Australia,”Journal of Business and Economic Statistics, Vol. 16, pp. 433–49.
Gagnon, Joseph, and Jane Ihrig, 2004, “Monetary Policy and Exchange Rate Pass-through,” International Journal of Finance and Economics, Vol. 9 (October), pp. 315–38.
Gregory, Allan, 1994, “Testing for cointegration in linear quadratic models”. Journal of Business and Economic Statistics 4: pp. 347–360.
Juselius, Katarina, 1992, “On the Empirical Verification of the Purchasing Power Parity and the Uncovered Interest Rate Parity”. Nationaløkonomisk tidskrift, 130, pp. 57–66.
Juselius, Katarina, 1992a, “Domestic and Foreign Effects on Prices in an Open Economy: The Case of Denmark,”Journal of Policy Modeling, Vol. 14, pp. 401–28.
Juselius, Katarina, 1994, “On the Duality Between Long-Run Relations and Common trends in the I(1) versus I(2) Model: An Application to Aggregate Money Holding,” Econometric Reviews, Vol. 13 (2), pp. 151–78.
Keran, Michael and Ahmed Al Malik, 1979, “Monetry Sources of Inflation In Saudi Arabia,” Federal Reserve Bank of San Francisco Economic Review, San Francisco.
Khan, Mohsin and Axel Schimmelpfennig, 2006, “Inflation in Pakistan: Money or Wheat?,” IMF Working Paper 06/60 (Washington: International Monetary Fund).
Laflèche, Thérèse, 1996/1997, “The Impact of Exchange Rate Movements on Consumer Prices”, Bank of Canada Review (Winter), pp. 21–32.
Lim, Cheng Hoon, and Laura Papi, 1997, “An Econometric Analysis of the Determinants of Inflation in Turkey,” IMF Working Paper 97/170 (Washington: International Monetary Fund).
Leo, Bonato, 2007, “Money and Inflation in the Islamic Republic of Iran,” IMF Working Papers 07/119, International Monetary Fund.
Mishkin, Frederic, 2008, “Exchange rate pass-through and monetary policy”, At the Norges Bank (Central Bank of Norway) Conference on Monetary Policy “Jarle Bergo Colloquium: Globalization and Monetary Policy”, Oslo.
Rogoff, Kenneth, 1996, “The Purchasing Power Parity Puzzle”, Journal of Economic Literature, Vol. 34, No. 2 (June), pp. 647–668.
Skine, Toshitaka, 2001, “Modeling and Forecasting Inflation in Japan,”IMF Working Paper 01/82 (Washington: International Monetary Fund).
Taylor, John, 2000, “Low inflation, pass-through, and the pricing power of firms”, European Economic Review Volume 44, Issue 7, June 2000, pp. 1389–1408.
Vigfusson, Robert, Nathan Sheets, and Joseph Gagnon, 2007, “Exchange Rate Pass-Through to Export Prices: Assessing Some Cross-Country Evidence”, International Finance Discussion Papers, Board of Governors of the Federal Reserve System.
Wang, Pengfei and Yi Wen, 2007, “Inflation dynamics: A cross-country investigation”, Journal of Monetary Economics. Vol. 54, Issue 7, pp. 2004–31.
Appendix 1. Detailed ECM Results
Appendix 2. Calculating Demand Gap Series
Appendix 3. Money Demand Equation and Excess Money Supply
Prepared when Hesham Alogeel was an intern at the IMF’s Middle East and Central Asia Department. The authors are grateful to Klaus Enders, Gene Leon, Timothy Lane, Bassam Kamar, Oral Williams, Holger Floerkemeier, Anna Ter Martirosyan, Rabah Arezki, Fuad Hasanov, and other colleagues at the IMF, as well as colleagues at the Saudi Arabian Monetary Agency and the GCC Secretariat for useful discussion and comments. The usual disclaimer applies.
This does not mean that the driving forces for inflation in the short term do not influence the regime choice. However, given their short term nature, policy makers would probably assign lower weight to them in deciding on the exchange rate and monetary regimes.
As defined in the INS weights.
Openness to imported labor has led to a large expatriate work force at all skill levels (represents more than 80 and 60 percent of the total labor force in Kuwait and Saudi Arabia, respectively), mostly from South Asia and other Arab countries.
However, the large influx of expatriates has occasionally created demand pressures on nontradables, especially in the real estate sector, where the supply response is relatively slow.
Mark-up models to empirically analyze the inflation are unlikely to be appropriate in the context of GCC countries given the unavailability of wages data and the flexible labor market.
For simplicity, we assume the existence of one cointegrating vector.
De Brouwer and Ericsson (1996) used private demand to construct a proxy for the output gap in their estimate for short term inflation dynamic in Australia.
For simplicity, we assume the existence of one cointegrating vector.
By including monetary variables in (6), we control for the effect of the monetary stance when we assess the impact of excess demand.
Juselius uses wage inflation to assess excess demand in the internal sector while we use simpler measures (see footnote 6). The assessment for the excess money supply is similar between the two models.
However, the model allows for testing the PPP hypothesis.
The decline might reflect, in part, the revaluation of the Kuwaiti dinar by 4 percent against the U.S. dollar in 1978.
For example, a negative impact for trading partners’ inflation and money supply on inflation.
We also examined changes in money supply and lagged money supply.
Money supply is I(2) in the case of Kuwait.
Khan and Schimmelpfennig (2006) suggested using credit as a proxy for money supply. The use of the credit to GDP ratio produces weak model selection criteria.
Cointegration tests for the period 1980–2007 indicate the existence of two cointegrating vectors at 5 percent significance level and one at a 1 percent significance level. These different results could be due to the fact that Eigenvalue and Trace statistics tests have tendency to over reject the null hypothesis due to small sample bias, i.e. suggest more cointegrating vectors as the sample size falls, or the number of variables or lags increases Gregory (1994).
Numbers in [ ] are t-statistics.
We also examined including commodity price index in the analysis but it did not yield significant results
The speed of adjustment is the number of periods (years) required to reduce one-half of a deviation from the long-run equilibrium. It is calculated as log (0.5)/log(1+δ1), see Rogoff (1996).
The time trend was included to account for the possibility of a trend in the cointegration relationship. As figure 4 shows, the inflation in Saudi Arabia appears to be declining slightly faster than its trading partners. This might capture the impact of improved credibility due to the peg. Table 3 shows that including the time trend enhances the results. It also improves the cointegrating graph.
The results were also robust to shorter sub-samples.
The results from WPI should be interpreted cautiously since WPI series is stationary. However, this could be due to the short time series.
It is hard to explain why trading partners’ inflation would have an impact that is higher than one in an open economy with a very low and stable tariff system.
Given that real money supply is I(1), changes in real money supply were included in this model to ensure comparability with the model for Saudi Arabia. However, the results are not sensitive to that.
This is done by using the inflation rate implied by the WPI index to calculate the CPI index for 1977. The CPI index for 1974–76 was obtained by using the inflation rate implied by the pre 1978 CPI series.
The restriction of equal NEER and trading partners’ inflation coefficients (α1 = −α2) was rejected based on log likelihood ratio test for the two countries.
With the exception of Japan, inflation in trading partners was always positive.
While subsidizing tradable commodities limits the pass-though effect, it has a fiscal cost, could create market distortion, and may encourage wasteful consumption.
They used quarterly data spanned from 1950s’ to 2004.
Using producer price index.