Has the non-oil sector decoupled from oil sector? A case study of Gulf Cooperation Council Countries

As oil and gas are exhaustible resources, the need for economic diversification has gained momentum in the Gulf Cooperation Council (GCC) countries immediately after the end of the first oil boom in 1973-74. Economic diversification, in the context of GCC countries, implies development of the non-oil sector and reduction of the proportion of government revenue and export proceeds from the oil and gas sector. Applying newly developed measures of business cycle synchronicity between oil and non-oil sectors in three GCC economies (Kuwait, Qatar and Saudi Arabia), we show both the degree of diversification achieved so far and the direction of diversification in terms of individual non-oil sectors. Overall, Kuwait and Saudi Arabia appear to be moderately ahead than Qatar in reducing their dependence on oil. Nevertheless, by developing large production capacities of natural gas, Qatar has recently reduced its dependence on oil in favor of natural gas. A quantitative assessment of the determinants of business cycle synchronization is also provided.Business cycle; Synchronization; Oil price; Fiscal policy; GCC countries

PPP TESTS IN COINTEGRATED PANELS: EVIDENCE FROM ASIAN DEVELOPING COUNTRIES

This paper tests the relative version of purchasing power parity (PPP) for a set of ten Asian developing countries using panel cointegration framework. We employ ¡®between-dimension¡¯ dynamic OLS estimator as proposed by Pedroni (2001b). The test results overwhelmingly reject the PPP hypothesis.Purchasing Power Parity, Panel Cointegration, Unit Roots.

The long-run relationship between savings and investment in oil-exporting developing countries: A case study of the Gulf Arab States

The relationship between national saving and investment over the long term is examined for six Gulf Arab oil-exporting developing countries -- Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. We show that, provided some large outliers are properly accounted for, long-run equilibrium relationships between saving and investment (both total and fixed) exist in these countries. Since these countries have typically large current account surpluses such relationships cannot be explained by standard arguments. Our hypothesis is that the response of investment to saving largely depends on domestic absorptive capacity.Saving-investment correlation; oil-exporting developing countries; GCC countries; absorptive capacity; outlier detection; integrated process.

Country Heterogeneity and Long-Run Determinants of Inflation in the Gulf Arab States

Applying nonstationary panel data econometric methods, this paper analyzes the major sources and transmission of inflation in the Gulf Cooperation Council (GCC) countries over the 1980-2008 period. We argue that, in GCC countries, money is essentially demand determined, so that the high collinearity between money and aggregate demand indicators such as non-hydrocarbon output is expected and should be dealt with accordingly. Several important results emerge from the analysis. First, the money supply stands out as a significant determinant of inflation both in short- and long-run. Both foreign prices and the nominal effective exchange rate are shown to be more successful in explaining inflation in the long-run than the short-run. The half-life of the speed of adjustment reveals that it takes about 2.9 years for 50% of a shock to the long-run equilibrium to dissipate. An implication of our results is the case it makes for more sovereign monetary policies in GCC countries.Inflation, Monetary policy, Fiscal policy, Exchange rates, Oil price, Panel data.

Essays on development and applied microeconomics

This thesis comprises three empirical chapters, which are self-contained but all related to household food consumption in Bangladesh. Chapter 2 examines the Engel curve for major expenditure categories and presents estimates of equivalence scales for Bangladesh. We compare Engel curves estimated by semi-parametric techniques to those arising from models based on consumer theory. Our analysis supports the argument for a quadratic food Engel curve for developing countries. Knowledge about the correct specification of Engel curves has important implications for modelling household responses to negative income shocks. Chapter 3 studies the effect of a sharp rice price increase on welfare and poverty in Bangladesh. We employ the household expenditure information to estimate the welfare loss induced by the price increase. Our findings suggest that we underestimate the proportionate welfare loss for rice producing households, and overestimate proportionate welfare loss of households who do not produce rice if we ignore indirect effects arising from a change in household consumption and production behaviour. Our estimates further support the hypothesis of a quadratic relationship between welfare loss and permanent household income. We also demonstrate that higher rice prices either increase or decrease the poverty head-count ratio, depending on the choice of the poverty line. However, if we consider the per capita income gap as a measure of poverty, we always observe that higher rice prices unambiguously increase poverty. In Chapter 4 we study the effect of the rice price increase between 2005 and 2010 on household rice consumption in Bangladesh. Using a simple difference-in-difference estimator and household level data, we find a negative effect on the value of non-rice food consumption of net rice buyers compared to self-sufficient households. On the other hand, there is no effect on the value of rice or non-food consumption. In contrast, we find that the higher rice price does not effect the value of rice consumption of rice sellers, but increases the value of other food and non-food consumption

International income risk-sharing and the global financial crisis of 2008-2009

This report examines the impact of the global financial crisis on the degree of international income and consumption risk-sharing among industrial economies using returns on cross-border portfolio holdings (e.g., debt, equity, FDI). It splits the returns from the net foreign holdings as receipts (inflows) and payments (outflows) to investigate which of the two sides exhibited the greater resilience for income risk-sharing during the recent crisis.First, it finds that debt delivered better risk-sharing than equity, mainly reflecting the deficit deterioration in EMU countries during the post-crisis period. FDI, by contrast, did not correspond to noticeable risk diversification. Second, separating output shocks into positive and negative components reveals that debt holding receipts (equity liability payments) performed better under negative (positive) realizations of the shock variable. Third, the unwinding of capital flows resulted in a sharp fall in income dis-smoothing via the debt liability channel in the new EU countries

Channels of risk-sharing among Canadian provinces: 1961--2006

This paper incorporates recent developments in the literature to quantify the amount of interprovincial risk-sharing in Canada. We find that 29% of shocks to gross provincial product are smoothed by capital markets, 27% are smoothed by the federal tax-transfer systems, and about 24% are smoothed by credit markets. The remaining 20% are not smoothed. Our results bring to light the critical role that Alberta plays in trading-off credit market smoothing for more capital market risk-sharing with the rest of Canada. Our pairwise risk-sharing analysis has brought up some interesting questions and arguments that are often neglected in discussions of regional risk-sharing. For example, one aspect of the pairwise analysis sheds light on the assessment of the economic effects of Quebec separation.Risk-sharing; pairwise risk-sharing; federal taxes and transfer; panel data; cross-sectional dependence.

Measuring Persistence of U.S. City Prices: New Evidence from Robust Tests

This paper revisits the empirical analysis in Cecchetti, Mark and Sonora (2002) involving long-span U.S. city prices, who estimated the persistence of U.S. price differentials to be around nine years. After controlling for the structural breaks in the data, we find that U.S. city price level differentials are I(0) stationary processes with the median half-life of convergence ranged between 1.5 and 2.6 years, estimates that are in accordance with what should be expected from a highly integrated economy as the United States. Our results are also robust to a pairwise tests of price level convergence.Purchasing power parity; Price level convergence; Half-life; Multiple structural breaks; Pairwise convergence.

Oil prices, exchange rates and emerging stock markets

While two different streams of literature exist investigating 1) the relationship between oil prices and emerging market stock prices and 2) the relationship between oil prices and exchange rates, relatively little is known about the dynamic relationship between oil prices, exchange rates and emerging market stock prices. This paper proposes and estimates a structural vector autoregression model to investigate the dynamic relationship between these variables. Impulse responses are calculated in two ways (standard and projection based methods). The model supports stylized facts. In particular, positive shocks to oil prices tend to depress emerging market stock prices and US dollar exchange rates in the short run. The model also captures stylized facts regarding movements in oil prices. A positive oil production shock lowers oil prices while a positive shock to real economic activity increases oil prices. There is also evidence that increases in emerging market stock prices increases oil prices.Emerging market stock prices; oil prices; exchange rates

From Home Bias to Euro Bias: Disentangling the Effects of Monetary Union on the European Financial Markets

Following the launch of the Euro in 1999, integration among Euro area financial markets increased considerably. As a result, portfolio home bias declined across the European financial markets. However, greater market integration has generated a new bias: portfolio Euro bias, a situation where Euro investors tend to hold large proportion of assets issued within the Euro region. The first part of this paper presents an empirical analysis of the economic factors at play behind the switch from home bias to Euro bias. We find that decline in default risk and transaction cost are two key determinants of the rise in portfolio Euro bias. The second part of the paper goes deeper into the effects of Euro bias on Euro area bond and equity markets. We observe that both government and corporate bond markets revealed clear signs of strain during the recent financial turmoil. Our results also reveal that the risk-reduction potential from geographic diversification within the Euro equity market is lower than that of the Euro sector diversification.Financial integration; home bias; Euro bias; transaction costs.