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Working Paper Series - In the Middle of the Heat The GCC Countries Between Rising Oil Prices and the Sliding Greenback



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In the Middle of the Heat The GCC Countries Between Rising Oil Prices and the Sliding Greenback


Volume : 0

No : 0

ISSN : WPS0801

Publisher : Arab Planning Institute - Kuwait

Author (s) : Weshah Razzak 

Published Date : 1/1/2008


Contents :
The paper asks twoquestions. One, what is the size of the effect of the increase in real oilprice on competitiveness of the Gulf Cooperation Council (GCC) countries –thereal exchange rate is a measure of competitiveness – and two, given recentconcerns about the sliding greenback and the consequent income and inflationaryproblems, would the GCC countries been “better off” had they pegged theircurrencies to the Euro dollar in 1991? To answer these questions we model andestimate the effect of oil prices on the competitiveness for the GCC then weprovide a test statistic to test whether the conditional variance of the modelhas remained stable under the US dollar peg compared to a counterfactualscenario, where the GCC countries peg their currencies to the Euro dollar in1991. We find the effect of the increase in the real price of oil oncompetitiveness of the GCC countries to be small, most of the domesticinflation is imported, and that there is a relatively large variation among theGCC economies with respect to the currency peg. The financial problems the GCCcountries face today are not about which currency (or a basket of currencies)they should peg to, but rather about the choice of the monetary arrangement asa whole. 

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