Global and Domestic Shocks on Inflation and Economic Growth and Membership Expansion in the GCC Bloc

International Review of Economics and Finance xxx (2013) xxx–xxx

REVECO-00790; No of Pages 20

Contents lists available at SciVerse ScienceDirect

International Review of Economics and Finance

j ourna l homepage: www.e lsev ie r .com/ locate / i re f

Impacts of global and domestic shocks on inflation and economic growth foractual and potential GCC member countries

Won Joong Kim a, Shawkat Hammoudeh b,⁎a Department of Economics, Konkuk University, Republic of Koreab Lebow College of Business, Drexel University, United States

a r t i c l e i n f o

⁎ Corresponding author.E-mail addresses: [email protected] (W.J. Kim

1 Kuwait pegs its currency to a basket of major curr

1059-0560/$ – see front matter © 2012 Elsevier Inc. Ahttp://dx.doi.org/10.1016/j.iref.2012.10.009

Please cite this article as: Kim,W.J., & Hammactual and potential GCC..., International Re

a b s t r a c t

Article history:Received 20 April 2012Received in revised form 26 October 2012Accepted 29 October 2012Available online xxxx

By using a modern structural VAR with block exogeneity and identifying restrictions, thispaper analyzes several global and regional oil and macroeconomic relationships related to theselected incumbent GCC member countries – Kuwait, Oman, Saudi Arabia – and the potentialmember Jordan. First, it examines the global macroeconomic linkages among the dollarexchange rate, oil price, China's producer price, U.S.'s export price, EU's export price andJapan's export price. Second, it investigates the effects of global and country-specific shocks onthe industrial production and consumer price indices of these GCC member countries and thepotential member Jordan. It thereby examines which individual global/local shocks commandmore importance in explaining the variations in the economic growth and inflation of eachactual and potential GCC member. Third, it analyzes the similarities in economic growth andinflation among the GCC countries after controlling for different global and country-specificshocks. The results suggest that the overall CPI inflation rates of Kuwait, Oman, Saudi Arabiaand Jordan are highly and positively correlated. The economic growth of Jordan showsnegative correlations with those of the member countries. If the GCC members are to focusonly on stabilizing inflation, there is no harm for them to accept Jordan as a new GCC member.However, if the GCC's objective is not only the stabilization of inflation but also the businesscycle synchronization, the GCC members should be more cautious in accepting Jordan as a newmember.

© 2012 Elsevier Inc. All rights reserved.

JEL classification:E3F4

Keywords:Structural VARBlock exogeneityExport pricesOil pricePass-through

1. Introduction

The economies of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates (UAE) are similar in many ways. Theseeconomies are part of the Gulf Cooperation Council (GCC), and these have experienced increased integration for the last three decades(Kim, Hammoudeh, & Alesia, 2012), have effectively pegged their currencies to the U.S. dollar and have had open capital accounts.1

They are highly dependent on oil production and exports for generating government revenues driven by an oversized public sectorwhich is significantly manpowered by foreign labor. Moreover, many of these countries possess large endowments of foreign assetsbecause of spurts of large oil revenues over the years, compared to their relatively narrow absorptive capacity which ishydrocarbon-based (Hammoudeh et al., 2009). They also share the same geographic area, language, climate and culture. However,the GCC countries are dissimilar in other important ways including economic growth and inflation, which are not alwayscommensuratewith the individual country's oil revenue prowess. Over the last two decades, the small oil producer Oman achieved the

), [email protected] (S. Hammoudeh).encies that closely follows the U.S. dollar.

ll rights reserved.

oudeh, S., Impacts of global and domestic shocks on inflation and economic growth forview of Economics and Finance (2013), http://dx.doi.org/10.1016/j.iref.2012.10.009

http://dx.doi.org/10.1016/j.iref.2012.10.009

mailto:[email protected]

mailto:[email protected]


http://www.sciencedirect.com/science/journal/10590560


https://www.researchgate.net/publication/256035965_Synchronization_of_Economic_Shocks_between_Gulf_Cooperation_Council_and_United_States_Europe_Japan_and_Oil_Market_Choice_of_Exchange_Rate_Regime?el=1_x_8&enrichId=rgreq-34a25694-ad55-42d7-ac3c-f0488bc44e9d&enrichSource=Y292ZXJQYWdlOzI1NjAzNDE4NztBUzoxMjE3NjUyMzc4OTEwNzNAMTQwNjA0MjUwNDAyNg==

2 W.J. Kim, S. Hammoudeh / International Review of Economics and Finance xxx (2013) xxx–xxx

highest economic growth associated with moderate inflation, while the world's largest oil exporter Saudi Arabia recorded the lowesteconomic growth over the sample period. The GCC country that has experienced the highest increase in the cost of living is UAE.

This disproportionate economic performance among the GCCs should have implications for their social and economic policiesincluding policies that deal with cost and standard of living, fiscal responses to challenges, rigidity of the indigenous labor market,mismatch between education and the needs of the labor market, and the creation of the monetary (and hopefully fiscal) union.Historically, economic growth and inflation differentials between the GCC countries had diverged and persisted for some timeand then tightened over other times to diverge again over the last two decades.2 This differential in economic and inflationperformances should not be very surprising despite the similarity between the GCC countries. These countries pursue differentfiscal policies, their indigenous labor markets have different rigidities, their housing markets vary from surpluses to shortages,and their needs for food imports relative to domestic production vary. All these factors contribute to the GCC country differentialsin economic growth and inflation. They also have an implication for any future expansion of the GCC membership.

The major focus of this paper is on the impacts of global shocks on the GCC countries' economic growth as embodied bychanges in domestic industrial production, and inflation as represented by changes in the domestic consumer price index, and onthe expansion of the GCC state membership. The global shocks include exchange rate shocks, oil price shocks, and shocks inexport prices of the United States, eurozone, Japan and China. Shocks in China's export price are represented by the producer priceindex for lack of adequate data on the Chinese export price index. Domestic GCC country shocks include shocks to domesticindustrial production and consumer price index, capturing shocks to domestic economic growth and inflation.

The GCC countries that are included in this study are determined by the availability of consistent data series on domesticindustrial production and CPI. These are Kuwait, Oman and Saudi Arabia which are in fact good representatives of all the GCCmembers. Moreover, since the GCC countries have expressed interest in expanding its membership and pinpointed certaincountries to be potential members who in turn also desire to join, we include Jordan as a potential GCC member country. Jordandoes not produce oil, but shares geography, language and culture, and has economic and labor ties with the incumbent GCCmember countries. To this end, we employ a structural VAR with block exogeneity and identifying restrictions to achieve theobjectives of the paper. This model includes macroeconomic linkages among the exchange rate, oil price, the producer price ofChina, the U.S. export price, the EU export price and Japan export price. It also addresses relationships between industrialproduction and the consumer price indices of the selected incumbent and potential GCC member countries.

The results show that if the GCC members are to focus only on stabilizing inflation, there is no harm for them to accept Jordanas a new GCCmember. On the other hand, since the GCC's objective is not focusing only on the stabilization of inflation but also onthe synchronization of the business cycle, the GCC countries should be more cautious in accepting Jordan as a new member.Given the fact that Jordan is not an oil-producing country, it would be a difficult task to achieve successful business cyclesynchronization between the GCCmember countries and Jordan, particularly if they want to form a lasting monetary union with acommon central bank.

The paper is organized as follows. After this introduction, Section 2 presents a review of the literature on the GCC integration,economic growth and inflation. Section 3 provides the model and its identification. Section 4 discusses the empirical results andSection 5 concludes.

2. Review of the literature

The literature on economic growth and inflation in the GCC countries has largely been carried out within the framework ofexamining the feasibility, suitability and desirability of having a monetary union embracing the six GCC countries.3 The mostprominent studies in this literature apply the standard VEC and conventional SVAR models to the economies of the GCC membercountries or the GCC as a prospective union. Hammoudeh and Aleisa (2004) examine the financial integration in the GCC stockmarkets by using the VEC model. They find that these markets are cointegrated in the long-run, but in terms of the short-termdynamics the authors find limited causal relationships among them. By testing for cointegration among the domestic exchangerates, inflation rates, monetary bases and GDPs, Darrat and Al-Shamsi (2005) conclude that the GCC countries are compatible toform a monetary union and the delay is due to political considerations. Hebous (2006) stresses the similarities and the highconvergence among the GCC countries, which render the macroeconomic cost of integration relatively low. Abu-Qarn andAbu-Bader (2007) examine the GCC economic integration by using three formal methods: the traditional SVAR, cointegration, andsynchronization of business cycles. They conclude that all those methods render no support for establishing a GCC monetaryunion. Jean-Louis, Balli, and Osman (2012) examine whether the GCC countries have symmetric aggregate demand shocks andnon-oil aggregate supply shocks with fellow GCC countries and with the U.S. and major European countries, by using a bivariateSVAR with long-run identifying restrictions. They find that all of these shocks are at least weakly symmetric among the GCCcountries. Alkholify and Alreshan (2009) argue that a unified monetary policy is necessary for a GCC monetary union to take placebut is not sufficient to have a successful union. They stress the paramount importance of the fiscal and monetary policies for theunion's success. Al-Omran (2010) investigates several factors that affect the readiness of the GCC countries to form a successfulGCC monetary union and contends that these countries are not yet ready for monetary integration. By estimating a traditional

2 Hammoudeh, S. 2010. “GCC Countries are Not Created Equal: Disproportions in GDP Weights, Economic Growth and Inflation”. http://blogs.zawya.com/shawkat.hammoudeh/100610023728/.

3 Bunik, Biswas, and Criddle (2009) examine economic similarities in South Asian countries and find that these countries are ready to form an optimumcurrency area.

Please cite this article as: Kim,W.J., & Hammoudeh, S., Impacts of global and domestic shocks on inflation and economic growth foractual and potential GCC..., International Review of Economics and Finance (2013), http://dx.doi.org/10.1016/j.iref.2012.10.009

http://blogs.zawya.com/shawkat.hammoudeh/100610023728/

http://blogs.zawya.com/shawkat.hammoudeh/100610023728/


3W.J. Kim, S. Hammoudeh / International Review of Economics and Finance xxx (2013) xxx–xxx

structural VAR that includes the world real GDP, domestic output, real exchange rate and the price level, Kandil and Trabelsi(2010) find that the GCC countries are far from meeting the conditions necessary for forming a monetary union. By using astructural VAR with block exogeneity, Kim, Hammoudeh, and Eisa (2012) examine the impacts of external shocks originatingfrom the U.S., EU, Japan and oil markets as well as those of the regional shocks, on the GCCs, being viewed as a prospectivemonetary union. Their findings imply that the world's two major currencies, the U.S. dollar and the euro, should figure highly in aGCC's common basket of currencies.

Another strand of the GCC literature examines the determinants of inflation differentials between the GCC countries. Thisstrand follows studies on inflation differential convergence in the eurozone. Honohan and Lane (2003) are among the first toinvestigate the determinants of the inflation differentials in the euro area.4 They contend that the nominal effective exchange rateand business cycle fluctuations are the key drivers behind the differentials. By using the dynamic stochastic general equilibrium(DSGE) model, Rabanal (2009) attempts to determine whether inflation rates in the EMU are converging or not. Rabanal findsthat productivity shocks account for 85% of the variability of the inflation differential, while demand shocks explain a largefraction of output growth volatility. Mohaddes and Williams (2011) use a pairwise approach to examine the main factors thatdrive inflation differentials in the GCC region. The results show that the GCC inflation differentials are largely influenced by the oilcycle, mainly through the credit and fiscal channels. The results also suggest that after controlling for cyclical factors, convergenceincreased even during the recent oil boom. Hasan and Alogeel (2008) estimate an error-correction model for Kuwait and SaudiArabia to examine the long-run determinants and the short-run dynamics of inflation in the GCC region. They find that tradingpartners' inflation as well as the exchange rate pass-through effect and oil prices are the main driving forces of inflation in thesecountries.

Overall, these findings are supported by Kandil and Morsy (2009) who estimate an error-correction model for each of the sixGCC countries. They find that inflation in their major trading partners appears to be the most relevant foreign factor. In addition,oil revenues have reinforced inflationary pressures through growth of credit and aggregate spending. In the short-run, bindingcapacity constraints also explain higher inflation given increased government spending. Nonetheless, by targeting supply-sidebottlenecks, the increase in government spending involves easing capacity constraints which will ultimately help moderateinflation. Basher and Elsamadisy (2010), employing a panel approach, examine the short-run and long-run determinants ofinflation in the GCC countries. They find that the money supply stands out as a significant determinant of inflation both in theshort- and long-run. Both foreign prices and the nominal effective exchange rate are shown to be more successful in explaininginflation in the long-run than the short-run.

3. The model and its identification

3.1. Estimation

Let Δzt ¼ Δz1tΔz2t

� �be an n-dimensional vector stochastic process, where z1t is an n1×1 vector of global macroeconomic

variables, z2t is an n2×1 vector of domestic macroeconomic variables of each of the actual and potential GCC countries, and n=n1+n2. The variable set z1t includes the trade-weighted nominal effective exchange rate of the U.S. dollar ($/foreign) (S), oil price(O), defined as the weighted average oil price of Dubai, Brent and WTI, dollar-based PPI of China (CN), U.S. export price index(US), dollar-based EU export price index (EU), and dollar-based Japan export price (JP) (n1=6), while set z2t contains industrialproductions and CPI's of each of the three GCC member countries (Kuwait, Oman, and Saudi Arabia) plus one candidate country(Jordan) (n2=2 for each of the actual and potential GCC countries).5 Besides the U.S. and EU export prices, Japan's export price isalso included because this country is a major source of exports and imports with the GCC countries. China is the world factory thatnot only provides final goods but also supplies intermediate goods to the world as well as the GCC countries, thus its inclusion asone of the global variables is warranted.

Assume that this process is generated by the dynamic linear model:

where

4 Ger5 We

Pleasactua

A0Δt ¼ A1Δzt−1 þ ⋯þ ApΔzt−p þ ut ; ð1Þ

ut ¼ u1tu2t

� �is a white noise vector process and Eutut′= I. The parameters of interest in Eq. (1) can be recovered from the

(reduced-form) VAR representation of Δzt, given a sample of observations and a set of identifying restrictions.The moving-average representation of the structural model is:

Δzt ¼ A0−A1L−⋯−ApLp

� �−1ut ¼ D0 þ D1Lþ D2L

2 þ ⋯� �

ut ¼ D Lð Þut : ð2Þ

lack-Kristen (2009) examines the synchronization of inflation and economic growth in Chinese provinces after trade liberalization.assume that industrial production and CPI of a given GCC country are independent of other GCC countries after controlling for global effects.

e cite this article as: Kim,W.J., & Hammoudeh, S., Impacts of global and domestic shocks on inflation and economic growth forl and potential GCC..., International Review of Economics and Finance (2013), http://dx.doi.org/10.1016/j.iref.2012.10.009


https://www.researchgate.net/publication/5114774_Divergent_Inflation_Rates_in_EMU?el=1_x_8&enrichId=rgreq-34a25694-ad55-42d7-ac3c-f0488bc44e9d&enrichSource=Y292ZXJQYWdlOzI1NjAzNDE4NztBUzoxMjE3NjUyMzc4OTEwNzNAMTQwNjA0MjUwNDAyNg==

https://www.researchgate.net/publication/46532017_Inflation_differentials_between_Spain_and_the_EMU_A_DSGE_perspective?el=1_x_8&enrichId=rgreq-34a25694-ad55-42d7-ac3c-f0488bc44e9d&enrichSource=Y292ZXJQYWdlOzI1NjAzNDE4NztBUzoxMjE3NjUyMzc4OTEwNzNAMTQwNjA0MjUwNDAyNg==


The series of coefficientmatrices {Dk}, k=0,…,∞, is absolutely summable, and each of the coefficientmatricesDk can be partitionedas:

6 For

Pleasactu

Dk ¼ Dk11 Dk

12

Dk21 Dk

22

!ð3Þ

k denotes the number of lags for the coefficient matrix D that goes from k=0 for contemporaneous to infinity periods. In
wherethe partition, each matrix Di,j
k has the dimension ni×nj, i, j=1, 2, where ni refers to the global macroeconomic partition and nj tothe domestic GCC macroeconomic partition. Thus, the partitioned matrices conform to the global oil/macroeconomic variablesub-vector and the domestic GCC macroeconomic variable sub-vector.

The grand objective is to discern how the endogenous variables (zt) respond over time to the exogenous structural shocks (ut).To realize this objective, we impose two sets of restrictions on the relations among the variables. The first set of restrictions is thatthe domestic GCC macroeconomic variables are mutually independent of other macroeconomic variables of other GCC countriesafter conditioning on the global macroeconomic variables at any lags. It means that the correlations across macroeconomicvariables of each GCC country are fully accounted for through their joint dependence on the aggregate variables in sub-system z1.This implies that the common global macroeconomic variables move the local macroeconomic variables together.

As noted by Kim et al. (2012), the within-GCC trade among the GCC member countries is very low. During the period2000–2008, the shares of exports to the GCC countries are 1.5% by Kuwait, 11.3% by Oman and 4.2% by Saudi Arabia. The shares ofthe individual GCC country's imports from the GCC bloc are 11.3% by Kuwait, 31.8% by Oman, and 4.4% by Saudi Arabia. There isalso no direct fiscal or monetary coordination among those countries. Therefore, the impacts of domestic shocks from one GCCcountry to other GCC countries are expected to be limited after controlling for global shocks. The second set of restrictions entailsthat the global oil/macroeconomic sub-system is independent of the local GCC macroeconomic variables (block exogeneity).6

That is, we assume that the local GCC macroeconomic variables are of negligible impact on the global system in comparison to theoil/macroeconomic variables. In the context of Eq. (3), the second set of restrictions implies that D12

0 =0.

3.2. Identification

While the independence among the GCC countries and block exogeneity restrictions solve the estimation problem, they arenot sufficient to identify the economic structure. The entire system can fully be identified by the restrictions both on the global oil/macroeconomic system (i.e., restrictions on D11

0 in Eq. (3)) and on the local macroeconomic system (i.e., restrictions on D220 in

Eq. (3)). To identify the global economic structure, we impose the short-run identifying restrictions on the global macroeconomicvariables, z1t, that include the nominal effective exchange rate of the U.S. dollar ($/foreign) (S), oil price (O), the dollar-based PPIof China (CN), the U.S. export price index (US), the dollar-based EU export price index (EU), and the dollar-based Japan exportprice (JP) (that is, the six global oil and macroeconomic variables). Most papers which utilize the long-run identifying restrictionsin the structural VAR framework rely on the stylized theories such as monetary neutrality. However, imposing long-runidentifying restrictions on the export prices of the U.S., EU and Japan, and the PPI of China may not be a good strategy because ashock in the export prices of one country can have persistent effects on the export prices of other countries. However, a change inthe exchange rate can contemporaneously affect the oil price (as explained earlier), the Chinese PPI and the export prices of majorcountries through their exchange rate pass-through behavior. While the oil price is thought to have no a contemporaneous effecton the exchange rate, it can affect the Chinese PPI, and the U.S. export price, the EU export price, and the Japan export price.

The relationship between the oil prices and the exchange rate assumes that the causality starts from the exchange rate to theoil prices based on several theoretical channels. Oil is considered a resource currency which is a substitute for a depreciating U.S.dollar. When the U.S. dollar weakens, investors move their funds from the greenback to oil and other resource currencies,whereby increasing their prices (e.g., Bhar & Hammoudeh, 2011; Naslioglu & Soytas, 2012). Cooper (1994) in the case of the OPECmembers and Brown and Phillips (1986) in the case of and the large industrialized economies also find that exchange ratesinfluence the oil price. More recently, the inverse relationship is attributable to the growing role of investors in commoditymarkets, related to falling financial asset returns (low interest rates) in advanced countries. Eggleston (2008) argues that thisrelationship is particularly potent when using time-varying parameters rather than constant parameters. He also sets forth threearguments based on recent developments in the financial markets: i) the currency markets are more liquid, and thus areincreasingly utilized by speculators to take macro views as proxies of other asset classes; ii) the currency markets are potentiallymore forward looking than real markets; and iii) nominal exchange rates can be considered as an asset price by discounting itsfundamentals (e.g. commodities) to attain an expected future value. Al-Ezzee (2011) contends that exchange rate depreciationleads to income transfer from importing countries to exporting countries through a shift in the terms of trade which include theoil price, and this affects the economic growth of both importing and exporting nations. Finally, The IMF's April 2006 WorldEconomic Outlook (Chapter 2), which uses a particular VAR to identify the shocks, demonstrates that there is essentially a zeroeffect of the oil shock on the real value of the U.S. dollar. Having said all that about the direct relationships, we must add that ourpaper also allows indirect mutual relationship between all the global variables including the exchange rates and the oil price.

China, as a world provider of both intermediate and final goods, can contemporaneously affect the export prices of the U.S., EUand Japan. The contemporaneous restrictions on the export prices of these three countries are based on their relative importance

more details on block exogeneity and estimation procedures, see Lastrapes (2005).

e cite this article as: Kim,W.J., & Hammoudeh, S., Impacts of global and domestic shocks on inflation and economic growth foral and potential GCC..., International Review of Economics and Finance (2013), http://dx.doi.org/10.1016/j.iref.2012.10.009


https://www.researchgate.net/publication/236373470_Changes_in_exchange_rates_and_oil_prices_for_Saudi_Arabia_and_other_OPEC_members?el=1_x_8&enrichId=rgreq-34a25694-ad55-42d7-ac3c-f0488bc44e9d&enrichSource=Y292ZXJQYWdlOzI1NjAzNDE4NztBUzoxMjE3NjUyMzc4OTEwNzNAMTQwNjA0MjUwNDAyNg==

https://www.researchgate.net/publication/251508799_Oil_price_agricultural_commodity_prices_and_the_dollar_A_panel_cointegration_and_causality_analysis?el=1_x_8&enrichId=rgreq-34a25694-ad55-42d7-ac3c-f0488bc44e9d&enrichSource=Y292ZXJQYWdlOzI1NjAzNDE4NztBUzoxMjE3NjUyMzc4OTEwNzNAMTQwNjA0MjUwNDAyNg==

https://www.researchgate.net/publication/256035965_Synchronization_of_Economic_Shocks_between_Gulf_Cooperation_Council_and_United_States_Europe_Japan_and_Oil_Market_Choice_of_Exchange_Rate_Regime?el=1_x_8&enrichId=rgreq-34a25694-ad55-42d7-ac3c-f0488bc44e9d&enrichSource=Y292ZXJQYWdlOzI1NjAzNDE4NztBUzoxMjE3NjUyMzc4OTEwNzNAMTQwNjA0MjUwNDAyNg==


in the world market. Thus, to fully identify the global shocks, we impose recursive short-run restrictions and the ordering in theglobal oil/macroeconomic system is: exchange rate ($/foreign)→oil price→Chinese PPI→U.S. export price→EU exportprice→ Japanese export price. The short-run multiplier D22

0 in Eq. (3) is a lower triangular matrix. Note, however, that all theglobal oil/macroeconomic variables are allowed to affect one another with lags.

Note that once D110 (the effects of global shocks on the global variables) and D22

0 (the effects of country-specific shocks on thelocal variables) are identified, and no further restrictions are required to identify D21

0 (the effects of global shocks on the localvariables).7

Each of the GCC countries' z2t includes two variables: industrial production and consumer price index. In the GCC block, weimpose short-run restrictions which assume that industrial production contemporaneously affects CPI. However, all the GCCvariables are allowed to affect one another with lags.

Based on the different lag selection information criteria such as Akaike Information Criterion (AIC) and the Schwartz BayesianCriterion (SBC), one lag is selected for this near-VAR system. Before we run the VAR, we perform unit-root tests by using both theaugmented Dickey–Fuller and the Phillips–Perron methods. The tests' results confirm that all the variables have unit roots inlevels and are stationary in first-differences. Under our block exogeneity assumption, cointegration is not warranted as the GCCvariables will not have impacts on the global variables. However, whether these variables have a cointegration relationship or notis subject to an empirical test. Therefore, we test the vector zt for the presence of cointegration by using the FIML techniques ofJohansen with the small sample correction as suggested by Reimers (1992). The improved Johansen tests reveal no strongevidence for the existence of the cointegrating vectors in the system. Thus, the model specification in which the variables are firstdifferenced and no error-correction terms are included is reasonable.8

4. Estimation results

4.1. Data and model specification

We obtained the monthly data on the nominal effective exchange rate of the U.S. dollar, the U.S. export price, and the U.S.import price index from the EU from the database of the Federal Reserve Bank of St. Louis. Moreover, we accessed the data on thedollar-based Japanese export price index from the Bank of Japan database. To see how changes in the exchange rate affect thedollar-denominated export prices of other countries, we use the U.S. import price index from the EU as a proxy for the EU exportprice index. A dollar-based producer price index is obtained from Global Insight that utilizes the local currency-based PPI of Chinafrom China National Bureau of Statistics and converts it into U.S. dollars. The weighted average oil price of Dubai, Brent andWTI isobtained from the IMF. The data on industrial production and CPIs of the GCC countries are obtained from Global Insight.

Due to the availability constraint on the starting dates of the data on the monthly producer price index of China, the sampleperiod spans 1997:1–2011:12, which includes 180 monthly observations. The global financial crisis, triggered by the subprimemortgage crisis in the United States, became prominently visible since September 2008 when the U.S. government took over twoUS-government sponsored enterprises Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home LoanMortgage Corporation) into a conservatorship run by the United States Federal Housing Finance Agency. To control for thefinancial crisis effect, we include a dummy variable (=1 since September 2008; =0 otherwise). After accounting for the monthlydummies and global financial crisis dummy as control variables and including the first-differenced lagged variables, there are 161degrees of freedom in each equation of the global oil/macro VAR, and 153 degrees of freedom in each equation of the localindustrial production/CPI of each GCC country and Jordan.

Table 1 shows the descriptive statistics for the log-differencedworld oil/macroeconomic and the GCC (and Jordan)macroeconomicvariables. On average, the variables considered generally show a positive growth. Only Japan's export price shows a negativegrowth over the sample period which has to do with the depression of the “lost decade”. That is, given the sample period of1997:1–2011.12, the negative price growth is partly due to the deflation in Japan. On average, Japan's export price falls by 0.02%monthly. Interestingly, among the relevant variables, the oil price and Jordan's industrial production show the highest volatility.The oil price fell by 28.5% between September and October of 2008 and Jordan's industrial production fell by 18.3% betweenDecember 1997 and January 1998. The oil price shows the highest rise in April 1999 (22.6%), while Jordan's industrialproduction shows the highest growth in January 2000 (26.7%).9 Interestingly, the oil price, the export prices of the U.S., EU andJapan, and the Chinese producer price recorded the biggest negative in the final quarter of 2008 due to the severe impact of the2007/2008 financial crisis on the world economy. Jordan's CPI also shows the biggest drop in that period.

7 See Lastrapes (2005) for more details.8 The cointegration test with global variables and the industrial production and CPI of Saudi Arabia reveals that the maximum eigenvalue test statistic for the

largest root is 43.39 which is less than the 5% critical value of 51.07, and the trace test statistic is 147.50 which is less than the 5% critical value of 157.11 asreported by Banerjee, Dolado, Galbraith, and Hendry (1993), Table 8.6. The cointegration test with global variables and variables of Jordan reveals that maximumeigenvalue is 40.69, and the trace is 137.59. With the Kuwait data, the maximum eigenvalue is 145.33 and the trace is 41.53. With Oman, the maximumeigenvalue is 41.39 and the trace test statistic is 157.16. All of the cointegration tests support the notion that there is no cointegration among global and localvariables. We also tried different cointegration tests including Banerjee et al. (1998), Bayer and Hanck (2009), Boswijk (1994)Engle and Granger (1987), Johansen(1988, 1995) tests, and the results confirm that the series have no cointegration.

9 The numbers in the parentheses show the exact percentage change calculations of the log-differenced data, i.e., (exp (*)−1) where * denotes a log-differenced value.



Table 1Descriptive statistics.

Variables Mean Standard deviation Minimum Maximum

(Units: %)

Exchange rate ($/) 0.12 1.77 −6.47 4.78Oil price 0.91 8.69 −33.55 20.38China PPI 0.12 1.29 −4.29 3.04U.S. export price 0.14 0.63 −3.24 1.63EU export price 0.17 0.64 −2.66 2.07Japan export price −0.05 0.51 −2.46 1.31Jordan CPI 0.32 0.82 −3.34 5.88Kuwait CPI 0.26 0.53 −1.54 2.29Oman CPI 0.18 0.53 −2.82 3.04Saudi Arabia CPI 0.17 0.36 −0.81 1.34Jordan IP 0.27 5.85 −20.25 23.65Kuwait IP 0.15 2.21 −8.00 9.40Oman IP 0.00 1.47 −4.35 5.76Saudi Arabia IP 0.13 2.09 −5.12 7.88

Note: the results are based on the log differenced variables.


Table 2 displays the simple correlations of the logged differenced variables. The exchange rate (depreciation of the U.S. dollar)shows somewhat positive correlations with the oil price (0.29), the China producer price (0.14), the U.S. export price (0.31), theEU export price (0.30), and the Japan export price (0.34). This is consistent with the purchasing power parity theory. Given thatall the prices in our global system are denoted in U.S. dollars, a depreciation of the U.S. dollar will cause non-U.S. prices to rise. Inother words, unless non-US countries – including China, EU, Japan and oil-producing countries – stick to complete local currencypricing strategies, a depreciation of the U.S. dollar will cause non-U.S. export and producer prices to rise. The positive correlationbetween the depreciation of the U.S. dollar and the U.S. export price may come from the fact that the United States importsintermediate goods from abroad.10 The oil price exhibits positive correlations with the China's PPI (0.18), the U.S. export price(0.53), the EU export price (0.43), the Japan export price (0.48), the Jordan CPI (0.14) and the Jordan industrial production (0.14).Oil is a cost and should affect export prices. Interestingly, on the production side the oil price shows virtually no correlation withthe domestic industrial production of Kuwait (0.00), Oman (0.00) and Saudi Arabia (0.09). This anecdotal result suggests that theoil price is not directly related to the GCC production of oil which dominates industrial production in each country. Oil belongs toa “one common pool” and thus its prices are determined globally. Prices of refined products are also determined globally. GCCindustrial production and oil prices may be correlated with a long lag. Moreover, the industrial sector (excluding oil) in many GCCcountries is less than 10% of GDP which is dominated by services. Non-oil exports (mostly light manufactured goods) are a smallpercentage of the industrial production in those countries, and thus their correlation with the exchange rate does not have astrong bearing on industrial production. Currently, oil prices are very high, while the GCC industrial production is weak.

The U.S. export price shows positive correlations with the EU export price (0.60), the Japan export price (0.69), the CPI's ofJordan (0.30), Kuwait (0.13), Oman (0.14) and Saudi Arabia (0.21) and with the industrial production of Kuwait (0.17) and SaudiArabia (0.10), underscoring the importance of the global business cycle, the law of one price and imported inflation. The EUexport price shows positive correlations with the Japan export price (0.51), the CPI's of Jordan (0.18), Kuwait (0.18) and SaudiArabia (0.18), and the IP's of Kuwait (0.17) and Saudi Arabia (0.10). The Japan export price shows positive correlations with theCPI's of Jordan (0.22), Oman (0.21) and Saudi Arabia (0.11) and with the industrial production of Kuwait (0.14). The intra-countrycorrelations between the CPI and IP of Jordan (0.01), Kuwait (0.04) and Saudi Arabia (0.03) are positive but small. However,Oman shows a higher degree of correlation (0.11) between the inflation and economic growth than the other countries, probablydue to its relatively small production base.

Table 2 only shows the pairwise correlations between the variables. The comovements between two different variables maycome from the third variables. We will thus report the correlations between the two variables after controlling for the commoneffect later in Table 5.

4.2. Impulse responses

Fig. 1 reports the accumulated responses which are the responses of each of the levels of the global variables to own and otherstructural shocks. In other words, the impulse response graphs show how the variables react when there is one standarddeviation in the orthogonalized shock. Thus, when the levels of CPIs and IPs of the actual and potential GCC member countries

10 Let p be the log of the dollar-denoted U.S. import price from a foreign country, p* be the log of the foreign currency export price by a foreign country, and s bethe log of the exchange rate ($/foreign). Then the following equation should hold: p=p*+s. The exchange rate pass-through on the U.S. import price is calculatedas: dp/ds=dp*/ds+1. If a foreign country takes a complete producer-currency pricing strategy, then dp* /ds=0 and dp/ds=1 (a complete exchange rate pass-through on the dollar-priced export price by a foreign country). If a foreign country chooses to take a complete local-currency pricing, dp*/ds=−1 and dp/ds=0.In the real world, 0bdp/dsb1. Therefore, dollar-denominated foreign export prices and oil price will rise in response to a depreciation of the U.S. dollar.



Table 2Simple correlations.

S Oil CN US EU JP PJ PK PO PS YJ YK YO YS

Exchange rate ($/) (S) 1.00Oil price (oil) 0.29 1.00China PPI (CN) 0.14 0.18 1.00U.S. export price (US) 0.31 0.53 0.39 1.00EU export price (EU) 0.30 0.43 0.37 0.60 1.00Japan export price (JP) 0.34 0.48 0.33 0.69 0.51 1.00Jordan CPI (PJ) 0.12 0.16 0.09 0.30 0.18 0.22 1.00Kuwait CPI (PK) 0.02 0.05 0.11 0.13 0.18 0.07 0.14 1.00Oman CPI (PO) 0.06 0.01 0.09 0.14 0.07 0.21 0.31 0.22 1.00Saudi Arabia CPI (PS) 0.00 −0.03 0.14 0.21 0.18 0.11 0.23 0.33 0.35 1.00Jordan IP (YJ) 0.04 0.14 −0.02 0.01 0.04 −0.10 0.01 −0.04 −0.08 −0.09 1.00Kuwait IP (YK) 0.03 0.00 0.21 0.17 0.15 0.14 0.03 0.04 0.09 0.01 0.00 1.00Oman IP (YO) −0.10 0.00 0.03 0.08 −0.05 0.04 0.09 −0.01 0.11 0.12 0.03 0.01 1.00Saudi Arabia IP (YS) 0.03 0.09 0.14 0.10 0.11 0.09 0.01 −0.04 0.00 0.03 −0.02 0.33 0.16 1.00

Note: the table shows the correlations of the logged differenced variables.


respond to different shocks, those responses can be interpreted as to how inflation and economic growth change over time,compared with the cases when there are no shocks. This figure also includes a one-standard error band for each response,generated from a Monte Carlo integration simulation with 1000 replications. Since the impulse responses of the variables arestabilized 12 months after different shocks, the forecasting horizon is set to 12 months (k=13).

4.2.1. Exchange rate depreciation shocksIn response to the exchange rate depreciation shocks, the exchange rate rises (the U.S. dollar depreciates) by 2.2%

instantaneously (k=1 month) and then stabilizes at 2.6% in the long-run (k=13 month), highlighting the relative persistence ofthe exchange rate depreciation.11 This exchange rate depreciation shocks have positive and statistically significant effects on theoil price, the Chinese producer price, the U.S. export price, the EU export price and the Japanese export price. This may partially beexplained by the impact of the dollar depreciation on commodity prices including oil price and comovement of global inflation.The oil price rises by 4.5% instantaneously and moves up further by 7.5% in the long-run. The Chinese producer price rises by 0.7%at the instant of the shock and by 2.0% in the long-run. The U.S. export price rises by 0.6% instantly and by 1.7% in the long-run,influenced by imported global inflation. The EU export price rises by 0.6% at the instant of the shock, and further rises by 1.5% inthe long run. Japan's export price rises by 0.4% instantly and by 1.2% in the long run, partially affected by the impact of the lostdecade and the relative stability of the yen. Thus, the degree of the exchange rate pass-through is the highest for the oil price andthe lowest for Japan's export price. Thus, the low sensitivity of the Japanese export price may reflect the severity of its deflationand insensitivity due to spending some good time in the liquidity trap. The result for the oil price is not surprising given the highsensitivity of the price to the U.S. dollar as explained earlier. A modest exchange rate pass-through effect on the U.S. export priceis somewhat surprising, given that the base currency of the U.S. is the U.S. dollar. However, the exchange rate pass-through on theU.S. export price may occur when the United States imports parts and other components from outside of the U.S. and it exportsfinal goods abroad. When the U.S. dollar depreciates, the dollar prices of parts and components imported by the U.S. firms rise.The depreciation of the dollar may be due to increases in the U.S. money supply. Thus, the U.S. export price responds positively tothe depreciation of the U.S. dollar.

4.2.2. Oil price shocksThe oil price shocks have statistically significant and negative impacts on the U.S. exchange rate (appreciation of the U.S.

dollar) in the long run, and statistically significant and positive impacts on the export prices of the U.S., EU and Japan and China'sproducer price. This could partially be the result of increases in global aggregate demand that shock the oil price. Moreover, asKilian (2009) pointed out, the oil price shock can be thought of as a precautionary demand shock associated with concerns aboutthe availability of future oil supplies. Historically, a good portion of the high volatility in the price of oil came from thegeo-political unrest in the Gulf area. The geopolitical instability in that region causes the oil price to rise and the U.S. dollar toappreciate (a fall in the $/foreign exchange rate) because of flight to safety. In response to the oil shocks, the U.S. exchange rateappreciates by 0.2% in the long run. The oil price rises by 9.3% at the instant of the shock and stabilizes at an 11.1% increase. TheChinese producer price rises by 0.7% at the instant of the shock and increases further by 1.7% in the long run. The U.S. export priceinstantly rises by 0.5% and further moves up further by 1.2% in the long run. In response to the oil shocks, the EU export priceinstantly increases by 0.4% and its rise stabilizes at 0.9%. Japan's export price instantly moves up by 0.5% and increases further by

11 These exchanage rate shocks can be thought of as shocks that are not correlated with other variables in the VAR system. Any shock that causes a depreciationof the U.S. dollar and is not correlated with the oil price, export prices or PPI of other countries in our VAR system can be a candidate. Given that the U.S. exchangerate depreciation shocks also raise the U.S. export price, then these exchange rate shocks may be interpreted as the U.S. nominal shocks originated from, forexample, an increase in money supply.



EX

.RA

TE

($/)

OIL

PR

ICE

CN

PP

US

EP

EU

EP

JP E

P

EX

.RA

TE

($/)

sho

ckO

IL P

RIC

E s

hock

CN

PP

sho

ckU

S E

P s

hock

EU

EP

sho

ckJP

EP

sho

ck

510

0.02

00

0.02

25

0.02

50

0.02

75

0.03

00

510

0.03

00

0.04

00

0.05

00

0.06

00

0.07

00

0.08

00

0.09

00

0.10

00

510

0.00

60

0.00

80

0.01

00

0.01

20

0.01

40

0.01

60

0.01

80

0.02

00

0.02

20

0.02

40

510

0.00

50

0.00

75

0.01

00

0.01

25

0.01

50

0.01

75

0.02

00

510

0.00

50

0.00

75

0.01

00

0.01

25

0.01

50

0.01

75

510

0.00

32

0.00

48

0.00

64

0.00

80

0.00

96

0.01

12

0.01

28

0.01

44

510

-0.0

020

-0.0

015

-0.0

010

-0.0

005

0.00

00

0.00

05

0.00

10

0.00

15

0.00

20

510

0.08

50

0.09

00

0.09

50

0.10

00

0.10

50

0.11

00

0.11

50

0.12

00

0.12

50

510

0.00

50

0.00

75

0.01

00

0.01

25

0.01

50

0.01

75

0.02

00

510

0.00

40

0.00

50

0.00

60

0.00

70

0.00

80

0.00

90

0.01

00

0.01

10

0.01

20

0.01

30

510

0.00

32

0.00

40

0.00

48

0.00

56

0.00

64

0.00

72

0.00

80

0.00

88

0.00

96

0.01

04

510

0.00

40

0.00

50

0.00

60

0.00

70

0.00

80

0.00

90

0.01

00

0.01

10

0.01

20

510

-0.0

020

-0.0

015

-0.0

010

-0.0

005

0.00

00

0.00

05

0.00

10

0.00

15

510

-0.0

100

-0.0

075

-0.0

050

-0.0

025

0.00

00

0.00

25

0.00

50

0.00

75

510

0.00

72

0.00

80

0.00

88

0.00

96

0.01

04

0.01

12

0.01

20

0.01

28

510

0.00

35

0.00

40

0.00

45

0.00

50

0.00

55

0.00

60

0.00

65

0.00

70

0.00

75

510

0.00

20

0.00

25

0.00

30

0.00

35

0.00

40

0.00

45

510

0.00

25

0.00

30

0.00

35

0.00

40

0.00

45

0.00

50

0.00

55

0.00

60

0.00

65

510

-0.0

032

-0.0

024

-0.0

016

-0.0

008

-0.0

000

0.00

08

0.00

16

510

-0.0

060

-0.0

040

-0.0

020

0.00

00

0.00

20

0.00

40

0.00

60

0.00

80

510

-0.0

005

0.00

00

0.00

05

0.00

10

0.00

15

0.00

20

0.00

25

510

0.00

34

0.00

36

0.00

38

0.00

40

0.00

42

0.00

44

0.00

46

0.00

48

0.00

50

510

0.00

03

0.00

05

0.00

08

0.00

10

0.00

13

0.00

15

0.00

18

0.00

20

510

0.00

10

0.00

12

0.00

14

0.00

16

0.00

18

0.00

20

0.00

22

0.00

24

0.00

26

510

-0.0

024

-0.0

020

-0.0

016

-0.0

012

-0.0

008

-0.0

004

-0.0

000

0.00

04

0.00

08

0.00

12

510

-0.0

060

-0.0

040

-0.0

020

0.00

00

0.00

20

0.00

40

0.00

60

510

-0.0

005

0.00

00

0.00

05

0.00

10

0.00

15

510

-0.0

004

-0.0

002

0.00

00

0.00

02

0.00

04

0.00

06

0.00

08

0.00

10

510

0.00

36

0.00

38

0.00

40

0.00

42

0.00

44

0.00

46

510

0.00

00

0.00

03

0.00

05

0.00

08

0.00

10

0.00

13

0.00

15

0.00

18

0.00

20

510

-0.0

015

-0.0

010

-0.0

005

0.00

00

0.00

05

0.00

10

0.00

15

510

-0.0

075

-0.0

050

-0.0

025

0.00

00

0.00

25

0.00

50

0.00

75

0.01

00

0.01

25

510

-0.0

010

-0.0

005

0.00

00

0.00

05

0.00

10

0.00

15

0.00

20

0.00

25

0.00

30

510

-0.0

005

0.00

00

0.00

05

0.00

10

0.00

15

0.00

20

510

-0.0

004

-0.0

002

0.00

00

0.00

02

0.00

04

0.00

06

0.00

08

0.00

10

0.00

12

510

0.00

35

0.00

40

0.00

45

0.00

50

0.00

55

0.00

60

0.00

65

Fig.

1.Re

spon

sesof

theglob

alva

riab

lesto

glob

alsh

ocks.*

Note:

PPde

notesCh

ina'sprod

ucer

priceinde

x,EP

represen

tstheex

port

priceinde

xforea

chof

theU.S.,EU

andJapa

n.





1.0%. The long-run pass-through effect of the oil price on the export prices is the lowest for EU and the highest for China. The EUcountries conserve the consumption of oil products, while China has the fastest growing demand for oil in the world.

4.2.3. Global price shocksA positive Chinese producer price shock causes appreciation of the U.S. dollar, increases in the global export prices and a fall in

the oil price. This shock may exhibit its impacts on the dollar through the expectation that the Chinese authorities would engagein inflation measures to cool off the economy, with eventually dampening its currency. The U.S. dollar would also appreciatebecause of the rising inflation differential, while the oil price falls in the long run because of fear of a restrictive monetary policy inChina and a stronger dollar. It also causes the export prices of the U.S., EU and Japan to rise because of higher prices of imports ofChinese intermediate and final goods both in the short-and long-run. Based on the responses of the global variables, the Chineseproducer price shocks may also be thought of as cost shocks to China. A rise in the Chinese producer price causes the Chineseproduction to fall, which leads to an appreciation of the U.S. dollar and a fall in the oil price. The magnitudes of the long-runpass-through effects of the Chinese producer price shock on export prices of the U.S., EU and Japan are 0.7%, 0.4%, 0.6%,respectively. The oil price falls by 0.8% in the long-run, reflecting the strength of Chinese demand for oil.

A U.S. export price shock causes the U.S. dollar to appreciate and the oil price and other global export prices to rise, reflecting ashock due to the strengthening of the U.S. and world economies. The oil price rises in the short-run. In that matter, the U.S. exportprice shocks can be thought as favorable demand shocks. The U.S. export price raises the EU export price by 0.1% and the Japaneseexport price by 0.2% in the long-run. Similarly, an EU export price shock causes the U.S. dollar to appreciate and the oil price torise. If an EU export shock is also thought of as the favorable demand shock to EU products comparatively, the euro shouldappreciate and the U.S. dollar should depreciate. A favorable demand shock to EU products may cause the oil price to rise. A goodportion of EU exports goes to the United States and that the EU and the U.S. economies are synchronized. Any positive EU exportprice shock reflects strength in the U.S. economy, which in turn has a positive impact on the U.S. dollar. The degree of the long-runpass-through effects of the EU export price shock on the Chinese producer price, the U.S. export price, and the Japanese exportprice is 0.1%, 0.1% and 0.4%, respectively. Additionally, a Japanese export price shock causes the U.S. dollar to appreciate and the oilprice to rise. Japan used to be the United States' third trading partner. Any strength in the Japanese exports and export prices alsoreflects a strong growth in the U.S. economy and its currency. Strength in Japan's export price may also reflect higher oil prices.The degree of long-run pass-through effects of the Japanese export price shock on the Chinese producer price, the U.S. exportprice, and the EU export price is 0.3%, 0.2% and 0.1%, respectively.

4.2.4. Responses of the GCC and Jordan CPIs and IPs to global shocksFigs. 2–5 show the dynamic responses of the CPI and industrial production (IP) of the actual and potential GCC countries to

different global shocks.12 The CPIs of all the GCC countries and Jordan show positive responses to the U.S. exchange ratedepreciation shocks (see the first column panels of Figs. 2–5). The GCC currencies are effectively linked to the U.S. dollar. Adepreciation of the U.S. dollar would bring imported inflation to the members from countries that have currencies not linked tothe dollar. Depreciation of the dollar is also supposed to increase the price of oil and the oil revenues and spending in the GCCcountries. This was the case in 2007 and 2008 in the GCC countries which suffered from double digit inflation as a result of higheroil prices. The higher CPI prices of the GCC countries and Jordan are also linked to the fact that their currencies are effectively tiedto the dollar, and thus their monetary policies are shackled. In response to this exchange rate shocks, the CPIs of Jordan, Kuwait,Oman and Saudi Arabia rise by 1.4%, 0.3%, 0.7%, and 0.5%, respectively, in the long-run. Kuwait pegs its currency to a basket ofcurrencies that is dominated by the dollar. Jordan shows higher sensitivity to dollar depreciation because its currency is notcompletely anchored to the dollar and it has more diversified trading partners that have non-dollar currencies. Its internationalreserves pool is also limited which makes it more vulnerable to currency changes. In terms of industrial production (IP) responseto the dollar depreciation shock, Jordan shows a positive but insignificant response to the exchange rate depreciation shocks.However, the IPs of Kuwait, Oman and Saudi Arabia show positive and statistically significant responses to the exchange rateshocks. One of the possible explanations to this phenomenon is that Kuwait, Oman and Saudi Arabia are oil-rich countries and thedepreciation of the U.S. dollar gives rise to a greater oil demand from non-dollar countries. Therefore, the GCC countries willproduce more oil and, given that the oil industry dominates their industrial production, the IP should also rise. The degree oflong-run exchange rate pass-through on industrial production of Kuwait, Oman and Saudi Arabia is 2.5%, 0.1% and 1.8%,respectively. Oman is a minor oil producer relative to the other GCC member countries, thus it would show a minor increase in oilproduction and consequently a smaller impact on its industrial production.

In response to the oil price shocks, most of the IPs and CPIs of the GCC countries would rise as can be seen in the secondcolumn panels of Figs. 2–5, because their economies are oil based. Only the industrial production of Jordan, which as indicatedbefore is an oil importer, shows a negative response to the oil price shocks. The IPs of Kuwait, Oman and Saudi Arabia rise by 2.1%,0.5% and 2.2%, respectively, in the long-run. As indicated earlier, Oman is a small oil producer. Moreover, in response to the oilprice shocks, the CPIs of Jordan, Kuwait, Oman and Saudi Arabia rise by 1.0%, 0.1%, 0.3% and 0.3%, respectively, in the long-run.Kuwait generously subsidizes basic food products and Oman subsidizes relatively less. Thus, the oil price still generally has agreater effect on the GCC's industrial production than inflation.

12 Baldwin and Yan (2008) find domestic and foreign influences on prices of 81 Canadian industries. The U.S. influence is stronger than the domestic impact inindustries that face higher competitive pressures. Agiomirgianakis and Zervoyianni (2001) suggest that globalization has an adverse effect on CPI inflation rates.



IP

CP

I

EX

.RA

TE

($/)

sho

ckO

IL P

RIC

E s

hock

CN

PP

sho

ckU

S E

P s

hock

EU

EP

sho

ckJP

EP

sho

ck

510

-0.0

030

-0.0

020

-0.0

010

0.00

00

0.00

10

0.00

20

0.00

30

0.00

40

0.00

50

510

0.00

25

0.00

50

0.00

75

0.01

00

0.01

25

0.01

50

510

-0.0

120

-0.0

100

-0.0

080

-0.0

060

-0.0

040

-0.0

020

0.00

00

0.00

20

0.00

40

510

0.00

20

0.00

30

0.00

40

0.00

50

0.00

60

0.00

70

0.00

80

0.00

90

0.01

00

0.01

10

510

-0.0

084

-0.0

072

-0.0

060

-0.0

048

-0.0

036

-0.0

024

-0.0

012

-0.0

000

0.00

12

510

0.00

00

0.00

10

0.00

20

0.00

30

0.00

40

0.00

50

0.00

60

510

-0.0

032

-0.0

016

0.00

00

0.00

16

0.00

32

0.00

48

0.00

64

510

0.00

15

0.00

20

0.00

25

0.00

30

0.00

35

0.00

40

0.00

45

0.00

50

0.00

55

510

-0.0

080

-0.0

060

-0.0

040

-0.0

020

0.00

00

0.00

20

0.00

40

510

-0.0

006

0.00

00

0.00

06

0.00

12

0.00

18

0.00

24

510

-0.0

075

-0.0

050

-0.0

025

0.00

00

0.00

25

510

-0.0

015

-0.0

010

-0.0

005

0.00

00

0.00

05

0.00

10

Fig.

2.Re

spon

sesof

thelocalv

ariables

toglob

alsh

ocks:Jorda

n.*Note:

IPde

notesindu

strial

prod

uction

inde

x,CP

Iistheco

nsum

erpriceinde

x,CN

PPisCh

ina'sprod

ucer

priceinde

x,U.S.E

PistheU.S.exp

ortp

rice

andEU

EPis

theEU

expo

rtprice.




IP

CPI

EX.RATE($/) shock OIL PRICE shock CN PP shock US EP shock EU EP shock JP EP shock

5 100.0050

0.0075

0.0100

0.0125

0.0150

0.0175

0.0200

0.0225

0.0250

0.0275

5 100.0005

0.0010

0.0015

0.0020

0.0025

0.0030

0.0035

0.0040

5 100.0025

0.0050

0.0075

0.0100

0.0125

0.0150

0.0175

0.0200

0.0225

0.0250

5 100.0000

0.0003

0.0005

0.0008

0.0010

0.0013

0.0015

0.0018

5 100.0060

0.0080

0.0100

0.0120

0.0140

0.0160

0.0180

0.0200

5 100.0004

0.0005

0.0006

0.0007

0.0008

0.0010

0.0011

0.0012

0.0013

5 10-0.0027

-0.0018

-0.0009

0.0000

0.0009

0.0018

0.0027

5 100.0002

0.0004

0.0006

0.0008

0.0010

0.0012

0.0014

0.0016

0.0018

5 100.0016

0.0024

0.0032

0.0040

0.0048

0.0056

0.0064

0.0072

0.0080

5 100.0006

0.0008

0.0010

0.0012

0.0014

0.0016

0.0018

0.0020

5 10-0.0016

-0.0008

0.0000

0.0008

0.0016

0.0024

0.0032

0.0040

0.0048

0.0056

5 10-0.0011

-0.0010

-0.0008

-0.0006

-0.0005

-0.0003

-0.0002

Fig. 3. Responses of the local variables to global shocks: Kuwait. 11W.J.K

im,S.H

ammoudeh

/InternationalReview

ofEconomics

andFinance

xxx(2013)

xxx–xxx

Pleasecite

thisarticle

as:Kim

,W.J.,&

Ham

moudeh,S.,Im

pactsofglobaland

domestic

shockson

inflation

andeconom

icgrow

thfor

actualandpotentialG

CC...,InternationalReviewofEconom

icsand

Finance(2013),http://dx.doi.org/10.1016/j.iref.2012.10.009


IP

CPI


5 10-0.0020

-0.0015

-0.0010

-0.0005

0.0000

0.0005

0.0010

0.0015

0.0020

0.0025

5 100.0010

0.0020

0.0030

0.0040

0.0050

0.0060

0.0070

0.0080

5 100.0010

0.0020

0.0030

0.0040

0.0050

0.0060

5 100.0000

0.0005

0.0010

0.0015

0.0020

0.0025

0.0030

0.0035

0.0040

5 100.0005

0.0010

0.0015

0.0020

0.0025

0.0030

0.0035

0.0040

5 100.0000

0.0005

0.0010

0.0015

0.0020

0.0025

0.0030

0.0035

0.0040

5 10-0.0010

-0.0005

0.0000

0.0005

0.0010

0.0015

0.0020

5 100.0010

0.0013

0.0015

0.0018

0.0020

0.0023

0.0025

0.0028

0.0030

5 10-0.0025

-0.0023

-0.0020

-0.0018

-0.0015

-0.0013

-0.0010

-0.0008

-0.0005

-0.0003

5 100.0005

0.0008

0.0010

0.0013

0.0015

0.0018

0.0020

0.0023

0.0025

0.0028

5 10-0.0015

-0.0013

-0.0010

-0.0008

-0.0005

-0.0003

0.0000

0.0003

0.0005

0.0008

5 100.0000

0.0002

0.0004

0.0006

0.0008

0.0010

0.0012

0.0014

Fig. 4. Responses of the local variables to global shocks: Oman.

12W.J.K

im,S.H

ammoudeh


ofEconomics

andFinance

xxx(2013)

xxx–xxx

Pleasecite

thisarticle

as:Kim

,W.J.,&

Ham

moudeh,S.,Im

pactsofglobaland

domestic

shockson

inflation

andeconom

icgrow

thfor

actualandpotentialG


icsand



IP

CPI


5 100.0025

0.0050

0.0075

0.0100

0.0125

0.0150

0.0175

0.0200

5 100.0010

0.0020

0.0030

0.0040

0.0050

0.0060

5 100.0060

0.0080

0.0100

0.0120

0.0140

0.0160

0.0180

0.0200

0.0220

0.0240

5 100.0004

0.0008

0.0012

0.0016

0.0020

0.0024

0.0028

0.0032

0.0036

0.0040

5 100.0009

0.0018

0.0027

0.0036

0.0045

0.0054

0.0063

0.0072

0.0081

0.0090

5 100.0010

0.0015

0.0020

0.0025

0.0030

0.0035

0.0040

5 10-0.0030

-0.0020

-0.0010

0.0000

0.0010

0.0020

0.0030

5 100.0006

0.0008

0.0010

0.0012

0.0014

0.0016

0.0018

0.0020

0.0022

5 100.0000

0.0010

0.0020

0.0030

0.0040

0.0050

0.0060

0.0070

5 100.0003

0.0005

0.0008

0.0010

0.0013

0.0015

0.0018

5 10-0.0032

-0.0024

-0.0016

-0.0008

-0.0000

0.0008

0.0016

0.0024

5 10-0.0005

-0.0003

0.0000

0.0003

0.0005

0.0008

0.0010

Fig. 5. Responses of the local variables to global shocks: Saudi Arabia. 13W.J.K

im,S.H

ammoudeh


ofEconomics

andFinance

xxx(2013)

xxx–xxx

Pleasecite

thisarticle

as:Kim

,W.J.,&

Ham

moudeh,S.,Im

pactsofglobaland

domestic

shockson

inflation

andeconom

icgrow

thfor

actualandpotentialG


icsand




In response to the Chinese producer price shocks, most of the IPs and CPIs of the GCC countries and Jordan would rise (see thethird column panels of Figs. 2–5) because China is an important trading partner with these countries. Thus, these shocks aresources of imports and imports inflation for the GCC and Jordan. Higher Chinese producer prices may affect other countries andmarkets as a source of global inflation. In Fig. 1, we show that the oil price falls in response to the Chinese producer price shocksbecause of the prospect of anti-inflationary policy. In terms of the oil-rich countries, Kuwait, Oman and Saudi Arabia have twooptions to address a fall in the oil price. The first option is to reduce the amount of oil produced to keep their oil price at higherlevels. The second option is to increase the oil production in order to sustain their budgets. The increases in industrial productionof Kuwait, Oman and Saudi Arabia confirm the latter option. Only the industrial production of Jordan shows a negative butstatistically insignificant response. A Chinese producer price shock can be a negative cost shock to the industrial production ofJordan. The Chinese producer price shocks unanimously raise the CPIs of Jordan, Kuwait, Oman and Saudi Arabia. These countriesimport Chinese goods. China is known as the world factory of goods.

In response to the U.S. export price shocks, the industrial production of the GCC countries generally shows insignificantresponses (the fourth column panels of Figs. 2–5) probably because the GCC currencies and oil revenues are effectively tied to theU.S. dollar. The CPIs of all these countries would rise both in the short-run and in the long-run. While the EU export price shockwould increase the IPs of the oil-rich producers Kuwait and Saudi Arabia, it would decrease the IPs of the oil less Jordan and theminor oil producer Oman (the fifth column panels of Figs. 2–5). The CPIs of all these countries would rise both in the short- andlong-run to EU export price shocks. The Japanese export price shock only has a positive effect on the industrial production ofKuwait (the sixth column panels of Figs. 2–5), probably because of Japan's extended recession. Other countries show a positivebut insignificant responses to the Japanese export price shocks. Most of these countries started to trade more with China and lesswith Japan because of the appreciation of the yen.

Figs. 6–9 show the dynamic responses of the IP and CPI in each of the GCC countries to its own country-specific shocks. In responseto their own industrial production shocks, the CPIs of Jordan and Omanwould rise because of a strong domestic demand for domesticresources, while the CPIs of the oil-rich Kuwait and Saudi Arabia would generally fall to the shocks (the first column panels ofFigs. 6–9) due to their dependence on foreign resources and increases in domestic productivity as these economies have moreeconomies of scale than Jordan. A rise in industrial production (IP) may have two effects on the CPI. First, if the IP shock is originatedfrom aggregate productivity shock, then the CPI would fall as conventional economic theory predicts. On the other hand, if the IPshock is originated from an aggregate demand shock, then CPI would rise. Given that most countries, except Jordan, are oil-rich

IP

CPI

IP shock CPI shock

2 4 6 8 10 120.0150

0.0175

0.0200

0.0225

0.0250

0.0275

0.0300

0.0325

0.0350

0.0375

2 4 6 8 10 120.0000

0.0005

0.0010

0.0015

0.0020

0.0025

2 4 6 8 10 12-0.0040

-0.0030

-0.0020

-0.0010

0.0000

0.0010

0.0020

0.0030

0.0040

2 4 6 8 10 120.0073

0.0075

0.0078

0.0080

0.0083

0.0085

0.0088

0.0090

0.0093

Fig. 6. Responses of the local variables to local shocks: Jordan.



IP

CPI

IP shock CPI shock

2 4 6 8 10 120.0175

0.0180

0.0185

0.0190

0.0195

0.0200

0.0205

0.0210

0.0215

0.0220

2 4 6 8 10 12-0.0025

-0.0023

-0.0020

-0.0018

-0.0015

-0.0013

-0.0010

-0.0008

-0.0005

-0.0003

2 4 6 8 10 12-0.0015

-0.0010

-0.0005

0.0000

0.0005

0.0010

0.0015

2 4 6 8 10 120.0030

0.0033

0.0035

0.0038

0.0040

0.0043

0.0045

Fig. 7. Responses of the local variables to local shocks: Kuwait.


countries and oil-rich countries offer subsidies, it is possible that a fall in CPI in response to an IP shock may come from the generousgovernment subsidies in Kuwait and Saudi Arabia. Those countries enjoy economies of scale over Jordan andOman,whichwould leadto cost saving. Generally, the IPs of the GCC countries show positive responses to the CPI shocks (the second column panels ofFigs. 6–9), which suggest that domestic inflation in these countries feeds on itself in response to a generated demand.

4.3. Variance decomposition

Table 3 reports the results of the variance decomposition of the global variables for horizons k=4 (threemonths after the shocks)and k=13 (12 months or 1 year after the shocks). The results show that the exchange rate volatility is mostly explained by its ownshock. The fluctuation in the oil price is greatly affected by the exchange rate in addition to its own shock. The major sources offluctuations in the Chinese producer price and the export prices of the U.S., EU and Japan are changes in the exchange rate and the oilprice.While the export prices of theU.S., EU and Japan do not play important roles in the volatility of the Chinese producer price, Chinaplays an important role in the price movements of the U.S., EU and Japanese exports, being the world factory of goods.

Table 4 reports the results of the variance decomposition of the IPs and CPIs of the GCC countries and Jordan. The table shows that,in addition to its own shock, the IP of Jordan is modestly affected by the oil price shock. The IPs of Kuwait, Oman and Saudi Arabia aregreatly affected by the oil shock, the Chinese producer price shock, and the EU export price shocks, in addition to their own IP shocks.The CPIs of the GCC countries are less affected by their own IP shock. Rather, they are greatly affected by the exchange rate shock, theoil price shock, the Chinese producer price shock, and the U.S. and EU export price shocks. The Japanese export price shocks play alimited role in themovement of CPIs of the GCC countries, probably due to its lost decade and reduced trade as indicated before. Theseresults underscore the importance of diversified sources of import inflation relative to domestic inflation.

4.4. Degree of synchronization among Jordan, Kuwait, Oman and Saudi Arabia

We show in Table 2 the simple pairwise correlations between all variables and point out that these simple correlations do notrule out the possibility of spurious relations. The comovements between two different variables may come from their relations tothird variables. To overcome this problem, we recalculate the shock response correlations by using the impulse responses of theGCC variables to different shocks. The results are reported in Table 5. Overall, the inflations of Jordan, Kuwait, Oman and Saudi



IP

CPI

IP shock CPI shock

2 4 6 8 10 120.0040

0.0050

0.0060

0.0070

0.0080

0.0090

0.0100

2 4 6 8 10 120.0000

0.0003

0.0005

0.0008

0.0010

0.0013

0.0015

2 4 6 8 10 12-0.0010

-0.0005

0.0000

0.0005

0.0010

0.0015

0.0020

2 4 6 8 10 120.0036

0.0038

0.0040

0.0042

0.0044

0.0046

Fig. 8. Responses of the local variables to local shocks: Oman.


Arabia are highly and positively correlated with respect to the exchange rate depreciation shocks, oil price shocks, Chineseproducer price shocks, U.S. export price shocks, EU export price shocks and own CPI shocks. However, as we see in Table 4 theJapanese export price shocks are not among the major sources of fluctuations in the CPIs of the GCC countries. All in all, theseglobal and domestic inflation shocks are not considered to be a major factor in deciding whether Jordan should join the GCC. Onthe other hand, in response to their own IP shocks, the inflation results show no clear patterns of responsiveness among theinflations of the GCC countries (Table 5.g). Within the individual GCC countries, Oman's inflation shows negative correlationswith the inflation of the major oil producers Kuwait and Saudi Arabia from the IP shocks. Interestingly, Jordan's inflation shows ahighly positive correlation with Oman's inflation. As indicated above, Oman is a minor oil producer.

The shock response correlations between the economic growths from different shocks also convey some importantinformation. Generally, the correlations between the economic growths of the GCC countries and Jordan from the exchange ratedepreciation shocks are positive. Thus, the degree of synchronization of the responses of these business cycles to the exchangerate shock is somewhat achievable. However, the business cycle of Jordan, which is an oil importer, shows negative correlationswith the business cycles of the incumbent, the oil-rich GCC member countries with respect to the oil price shocks, the Chineseproducer price shocks, and the U.S. export price shocks. Negative correlations of the business cycle of Jordan with the businesscycles of Kuwait, Oman and Saudi Arabia to the oil price shock are expected ex ante, but its negative correlations with the GCCmember countries from the Chinese producer price shock and the U.S. export price shock are somewhat surprising. Thus, theeconomic road to aspiring Jordan to join the GCC members is not all clear and smooth.

5. Conclusions

This paper uses a structural VAR model with block exogeneity and identifying restrictions to examine twomajor issues relatedto economic growth and inflation in the incumbent GCC member countries and the aspirant country Jordan. Based on theavailability of data, the selected incumbent GCC members are Kuwait, Oman and Saudi Arabia which are oil producers of varyingprowess that is immense for the third member. The aspirant country Jordan, which is not an oil producer, has expressed a strongdesire since 1995 to join the GCC as a full member.

The first issue is related to global macroeconomic linkages among the dollar exchange rate, the oil price, China's producerprice, U.S.'s export price, EU's export price and Japan's export price. Thus, it relates to the effects of global shocks on the economic



IP

CPI

IP shock CPI shock

2 4 6 8 10 120.0185

0.0190

0.0195

0.0200

0.0205

0.0210

0.0215

0.0220

0.0225

0.0230

2 4 6 8 10 12-0.0018

-0.0015

-0.0013

-0.0010

-0.0008

-0.0005

-0.0003

0.0000

2 4 6 8 10 12-0.0021

-0.0014

-0.0007

-0.0000

0.0007

0.0014

0.0021

2 4 6 8 10 120.0040

0.0045

0.0050

0.0055

0.0060

0.0065

0.0070

Fig. 9. Responses of the local variables to local shocks: Saudi Arabia.


growth and inflation of the GCC countries and Jordan. The impulse response analyses show that all the global shocks considered inthis paper have generally positive effects on the inflation of the GCC countries. This finding suggests that the GCC inflation iscaused by the oil boom, depreciating U.S. dollar relative to other countries' currencies, imports inflation from major countries orblocks and domestic sources. The implication of this result has a bearing on the need for having an effective monetary policy,selecting the degree of link between these countries' currencies and the U.S. dollar, labor market flexibility and the magnitude ofsubsidies for the basic ingredients of life.

Specifically, the variance decomposition results show that the U.S. exchange rate depreciation shocks followed by the oilshocks are the major sources of inflation in the GCC countries. Oil price aside, this important result underscores the GCCcountries' vulnerability to anchoring their currencies to the U.S. dollar, particularly during dollar depreciation. This is consistent

Table 3Variance decomposition of global variables at different forecasting horizons.

ShocksResponses

K S Oil CNPPI

USEPI

EUEPI

JPEPI

Exchange rate($/) (S)

4 98.8 0.1 0.1 0.8 0.3 0.013 97.8 0.3 0.2 1.1 0.5 0.0

Oil price (oil) 4 28.5 71.0 0.2 0.0 0.0 0.213 30.7 68.7 0.3 0.0 0.0 0.3

China PPI (CN) 4 43.5 34.7 20.6 0.5 0.1 0.613 47.7 34.2 16.7 0.4 0.1 0.8

U.S. export price (US) 4 55.1 27.5 10.9 6.0 0.1 0.413 58.3 27.2 9.4 4.4 0.1 0.6

EU export price (EU) 4 63.7 24.0 4.7 0.5 7.0 0.213 66.5 23.6 4.1 0.3 5.2 0.3

Japan export price (JP) 4 43.0 30.8 11.3 1.6 0.6 12.813 46.5 30.7 9.9 1.3 0.6 11.0

Note: EPI denotes the export price index. Variance decomposition is read horizontally for each endogenous variable to sum up to 100%.



Table 4Variance decomposition of GCC variables at different forecasting horizons.

ShocksResponses

K Own IP Own CPI S OIL CNPPI

USEPI

EUEPI

JPEPI

Jordan IP 4 90.9 0.1 0.3 5.6 0.3 0.6 1.3 0.913 89.8 0.2 0.1 7.0 0.2 0.6 1.4 0.7

CPI 4 0.6 29.1 33.6 19.1 9.5 6.3 1.6 0.313 0.4 20.6 41.7 21.4 9.2 5.2 1.4 0.1

Kuwait IP 4 34.9 0.0 23.2 18.5 20.3 0.1 2.6 0.313 24.2 0.0 31.7 22.5 18.7 0.1 2.3 0.6

CPI 4 6.7 50.6 22.5 3.1 3.9 6.1 6.2 1.113 6.8 43.6 30.2 3.7 3.5 5.8 5.6 0.9

Oman IP 4 67.4 1.6 0.7 18.1 7.1 0.2 4.7 0.213 59.6 1.6 1.2 24.6 8.9 0.1 3.9 0.1

CPI 4 1.4 28.3 32.0 7.3 13.7 9.4 7.5 0.613 0.9 18.9 42.5 10.5 13.0 7.4 6.1 0.7

Saudi Arabia IP 4 46.4 0.1 15.7 31.2 3.5 0.1 2.9 0.113 36.4 0.1 22.5 34.5 3.6 0.1 2.8 0.0

CPI 4 1.2 55.6 20.1 6.9 10.0 4.6 1.5 0.113 1.1 45.2 28.0 9.8 10.2 4.2 1.4 0.1

Note: EPI denotes the export price index. Variance decomposition is read horizontally for each endogenous variable to sum up to 100%.


with the findings of Honohan and Lane (2003) who contend that the nominal effective exchange rate and business cyclefluctuations are the key drivers behind the differentials in Europe. China's producer price shock, which is a supply shock,approximates the oil price shock in inflation impact, highlighting the importance of the “China factor” on the GCC inflation.Finally, the demand shocks of the U.S. and EU export prices also have some but varying impacts on the GCC inflation. However,the Japanese export shock has a very limited effect on the GCC inflation probably because of its extended deflation and lostdecade. The policy implication of this result points to the need of synchronizing the baskets of currencies that back theirexchange rates with the diversity of their trading partners.

As far as the aspirant Jordan is concerned, the oil price shock has a more sizable upward effect on its inflation than on theinflation of the oil-producing GCC countries. On the other hand, the responsiveness of Jordan's inflation to the non-oil globalshocks is similar to that of the GCC countries. Jordan should also have a more effective monetary policy, more flexibleexchange rate and more government subsidies of basic products to avoid political unrest, and be in harmony with the GCCcountries.

In terms of industrial production and economic growth, the oil-rich GCC countries show different responses to global shocksthan Jordan. The results show that Jordan's economic growth is mainly affected by its domestic growth shock (about 90% of thetotal variation in the economic growth) andmarginally by the oil price shock (about 7%) in the long run. Economic growth of theoil-rich GCC countries is not only affected by their own domestic shocks (up to 60% for Oman, for example), but is also greatlyaffected by the U.S. exchange rate depreciation shock (up to 32% for Kuwait), oil price shock (up to 35% for Saudi Arabia),Chinese producer price shock (up to 19% for Kuwait) and EU export price shock (up to 4% for Oman) in the long run. The U.S.export price shocks only have minor effects on the economic growth of the GCC countries probably because the GCC currenciesand oil revenues are effectively tied to the U.S. dollar. Thus, this second major result highlights the importance of the dollardepreciation and China's producer price shocks, as well as the oil shock, on the GCC economic growth which is not the case forJordan.

The second issue in this paper concerns the similarities in economic growth and inflation among the selected incumbentGCC member countries and the aspiring Jordan. An important question here relates to whether there is a significantsynchronization between the incumbent GCC members and the aspirant Jordan that would make a case for Jordan to joinmerely on economic grounds. The results demonstrate that if the GCC members are focused only on stabilizing inflation, thenthere is no harm for them to accept Jordan as a new GCC member. However, if the GCC's objective is not only focused on thestabilization of inflation but also on the business cycle synchronization which is more important, then the GCC should takemore cautious steps in accepting Jordan as a new member. Given that Jordan is not an oil-producing country, it would bedifficult to achieve business synchronization between the GCC member countries and Jordan. Given, however, that Jordan'sgeography, language and culture conformity with the other GCC countries, closer ties can be formed through enhanced labormobility and workers' remittances.

Acknowledgments

The authors thank the editor, Hamid Beladi, for his guidance and support and the anonymous referee for his/her invaluablecomments.



Table 5Degree of synchronization in response to inflations and economic growth of GCC countries to different shocks: impulse response correlation analysis.

Economic growth Inflation

Jordan Kuwait Oman Saudi Arabia Jordan Kuwait Oman Saudi Arabia

a) From exchange rate shocks1.00 1.000.05 1.00 0.97 1.000.31 0.09 1.00 0.99 0.96 1.00

−0.08 0.98 −0.08 1.00 0.98 0.96 0.98 1.00

b) From oil price shocks1.00 1.00

−0.48 1.00 0.90 1.00−0.34 0.84 1.00 0.80 0.72 1.00−0.54 0.95 0.95 1.00 0.80 0.88 0.88 1.00

c) From China's producer price shocks1.00 1.00

−0.43 1.00 0.76 1.00−0.59 0.98 1.00 0.98 0.61 1.00−0.37 1.00 0.97 1.00 0.99 0.84 0.94 1.00

d) From U.S.'s export price shocks1.00 1.00

−0.69 1.00 0.97 1.00−0.91 0.89 1.00 1.00 0.98 1.00

0.12 0.38 0.23 1.00 1.00 0.96 1.00 1.00

e) From EU's export price shocks1.00 1.00

−0.27 1.00 0.92 1.00−0.04 −0.86 1.00 0.99 0.90 1.00−0.60 0.89 −0.56 1.00 0.96 0.77 0.96 1.00

f) From Japan's export price shocks1.00 1.000.30 1.00 −0.73 1.00

−0.52 −0.59 1.00 −0.88 0.95 1.000.13 0.85 −0.82 1.00 −0.80 0.71 0.87 1.00

g) From country−specific own industrial production shocks1.00 1.000.91 1.00 −0.93 1.001.00 0.94 1.00 0.81 −0.54 1.000.89 1.00 0.92 1.00 −0.73 0.89 −0.30 1.00

h) From country-specific own CPI shocks1.00 1.000.98 1.00 0.97 1.001.00 0.96 1.00 0.99 0.99 1.00

−0.80 −0.89 −0.74 1.00 0.99 0.93 0.96 1.00

Note: the correlations are calculated by using the responses of unaccumulated (in log-differenced) variables to different shocks.


References

Abu-Qarn, A. S., & Abu-Bader, S. (2007). Sources of growth revisited: Evidence from selected MENA countries. World Development, 35(5), 752–771.Agiomirgianakis, G., & Zervoyianni, A. (2001). Globalization of labor markets and macroeconomic equilibrium. International Review of Economics and Finance, 10,

109–133.Al-Ezzee, I. (2011). Real influences of real exchange rate and oil price changes on the growth of real GDP: Case of Bahrain. International conference on management

and service science (IPEDR), 8, Singapore: IACSIT Press (2011).Alkholify, A., & Alreshan, A. (2009). GCC monetary union. Bank of International Settlement IFC bulletin, 32, (http://www.bis.org/ifc/publ/ifcb32b.pdf)Al-Omran, A. (2010). Toward a common GCC currency: Are the GCC countries ready? (http://www.scribd.com/doc/32483285/GCC-Common-Currency)Baldwin, J. R., & Yan, B. (2008). Domestic and foreign influences on Canadian prices. International Review of Economics and Finance, 17, 546–557.Banerjee, A., Dolado, J., Galbraith, J. W., & Hendry, D. F. (1993). Co-integration, error-correction, and the econometric analysis of non-stationary data. Oxford: Oxford

University Press.Banerjee, A., Dolado, J. J., & Mestre, R. (1998). Error-correction mechanism tests for cointegration in a single equation framework. Journal of Time Series Analysis,

19(3), 267–283.Basher, S. A., & Elsamadisy, E. M. (2010). Country heterogeneity and long-run determinants of inflation in the Gulf Arab States. Central Bank of Qatar working paper

(Doha, Qatar).Bayer, C., & Hanck, C. (2009). Combining non-cointegration tests. METEOR research memorandum no. 09/012Maastricht: Maastricht University.Bhar, R., & Hammoudeh, S. (2011). Commodities and financial variables: Analyzing relationships in a changing regime environment. International Review of

Economics and Finance, 20(4), 469–484.


http://www.bis.org/ifc/publ/ifcb32b.pdf

http://www.scribd.com/doc/32483285/GCC-Common-Currency



Boswijk, H. P. (1994). Testing for an unstable root in conditional and unconditional error correction models. Journal of Econometrics, 63, 37–60.Brown, S. P. A., & Phillips, K. (1986). Exchange rates and world oil prices. Economic and Financial Economic Review, 1–10 (March).Bunik, N., Biswas, B., & Criddle, K. F. (2009). Optimum currency area in South Asia: A state space approach. International Review of Economics and Finance, 18, 502–510.Cooper, R. (1994). Changes in exchange rates and oil prices for Saudi Arabia and other OPEC members. Journal of Energy and Development, 20, 109–128.Darrat, A., & Al-Shamsi, F. S. (2005). On the path of integration in the Gulf region. Applied Economics, 37, 1055–1062.Eggleston, P. (2008). Currency and commodity relationships. : Royal Bank of Scotland (http://www.ftbusinessevents.com/commoditycurrencies/images/contentpage/

pete%20eggleston-rbs.pdf)Engle, R. F., & Granger, C. W. J. (1987). Co-integration and error correction: Representation, estimation, and testing. Econometrica, 55(2), 251–276.Gerlack-Kristen, P. (2009). Business cycle and inflation synchronization in Mainland China. International Review of Economics and Finance, 18, 404–418.Hammoudeh, S., & Aleisa, E. (2004). The dynamic linkage of the GCC stock markets. Contemporary Economic Policy, 22(1), 50–62.Hammoudeh, S., Sari, R., & Al-Eisa, E. (2009). GCC petrodollar surpluses and the U.S. current account imbalance. Eknomik Yaklasin (Economic Approach), 73, 39–54.Hasan, M., & Alogeel, H. (2008). Understanding the inflationary process in the GCC region: The case of Saudi Arabia and Kuwait. International Monetary Fund

working paper no. WP/08/193 (Washington, D.C.).Hebous, S. (2006). On the monetary union of the Gulf states. The Kiel Institute for the world economy study paper no. 431 (Kiel, Germany).Honohan, P., & Lane, P. R. (2003). Divergent inflation rates in EMU. Economic Policy, 18(37), 357–394.Jean-Louis, R., Balli, F., & Osman, M. (2012). On the feasibility of monetary union among Gulf Cooperation Council (GCC) countries: Does the symmetry of shocks

extend to the non-oil sector? Journal of Economics and Finance, 36(2), 319–334.Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 12(2–3), 231–254.Johansen, S. (1995). Likelihood-based inference in cointegrated vector autoregressive models. Oxford: Oxford University Press.Kandil, M. E., & Morsy, H. (2009). Determinants of inflation in the GCC. International monetary fund working paper no. WP/09/82 (Washington, D.C.).Kandil, M., & Trabelsi, M. (2010). Is the announced monetary union in GCC countries feasible? A multivariate structural VAR approach. Economic research forum

working paper no. 522 (Cairo). The paper was presented at the 16th annual economic research forum, Cairo, Egypt, November 7–9, 2010 (http://ideas.repec.org/p/erg/wpaper/522.html)

Kilian, L. (2009). Not all oil price shocks are alike: Disentangling demand and supply shocks in the crude oil market. The American Economic Review, 99(3), 1053–1069.Kim, W. -J., Hammoudeh, S., & Alesia, E. (2012). Synchronization of economic shocks between Gulf Cooperation Council and United States, Europe, Japan, and oil

market: Choice of exchange rate. Contemporary Economic Policy, 30(4), 584–602.Lastrapes, W. D. (2005). Estimating and identifying vector autoregressions under diagonality and block exogeneity restrictions. Economic Letters, 87, 75–81.Mohaddes, K., & Williams, O. (2011). Inflation differentials in the GCC: Does the oil cycle matter? International Monetary Fund working paper no. WP/11/294

(Washington, D.C.).Naslioglu, S., & Soytas, U. (2012). Oil price, agricultural commodity prices, and the dollar: A panel cointegration and causality analysis. Energy Economics, 34(4),

1098–1104.Rabanal, P. (2009). Inflation differentials between Spain and the EMU: A DSGE perspective. Journal of Money, Credit, and Banking, 41, 1141–1166.Reimers, H. E. (1992). Comparisons of tests for multivariate cointegration. Statistical Papers, 33(1), 335–359.


http://www.ftbusinessevents.com/commoditycurrencies/images/contentpage/pete%20eggleston-rbs.pdf

http://www.ftbusinessevents.com/commoditycurrencies/images/contentpage/pete%20eggleston-rbs.pdf

http://ideas.repec.org/p/erg/wpaper/522.html

http://ideas.repec.org/p/erg/wpaper/522.html


Global and Domestic Shocks on Inflation and Economic Growth and Membership Expansion in the GCC Bloc

Documents

Transcript of Global and Domestic Shocks on Inflation and Economic Growth and Membership Expansion in the GCC Bloc