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.

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

Regional Initiative in the Gulf Arab States: The Search for a Common Currency

Purpose – This paper makes two main additions to the literature on GCC (Gulf Cooperation Council) monetary union. First, it emphasizes that the creation of a fiscal union is necessary for the GCC monetary union to succeed. Second, it proposes some alternatives to pegging to the dollar, which would allow the GCC countries to absorb large swings in global commodity prices (oil, food) in the short to medium run. Design/methodology/approach – This paper uses exploratory research to shed light on the feasibility of a common currency for the proposed GCC Monetary Union. Findings – Given the challenges associated with creating a GCC fiscal union as a requirement for a successful monetary union, the GCC countries could easily set up an “anti-crisis fund” to partially protect themselves from the economic and social costs of unforeseen crises. A BBC (basket, band, and crawl) currency system, at an individual country level or a regional level, would allow the GCC countries to cope with not just large swings in global commodity prices, but also as an effective instrument for the governments to promote their economic diversification. Practical implications – This paper offers a template for the GCC central banks to consider the BBC currency system as an alternative to their existing dollar peg regime. Originality/value – This is the first paper that attempts to provide a formal argument in support of the BBC currency system as an alternative exchange rate arrangement for the GCC countries. Paper type – Conceptual paper

Regional Initiative in the Gulf Arab States: The Search for a Common Currency

While many commentators have been openly critical of China's currency policy on the basis of an undervalued renminbi, despite a similar surge in GCC's (Gulf Cooperation Council) balance of payment surpluses in the first decade of this century, the vast majority of the commentators have maintained a stony silence on the undervalued Gulf currencies. This underscores the geopolitics of currencies as a form of asymmetric warfare and the consequences of dollar, euro or renminbi diplomacy. This paper makes two main additions to the literature on Gulf monetary union. First, it emphasizes that the creation of a fiscal union is necessary for the Gulf monetary union to succeed. Second, it proposes some alternatives to pegging to the dollar, which would allow the GCC to absorb large swings in global commodity prices (oil, food) in the short to medium run. The proposed exchange rate regimes are not conditional on the formation of the Gulf monetary union, and can be implemented individually or collectively

Oil and other energy commodities

This chapter provides a survey of studies concerning the relationship between crude oil prices and other energy commodities such as coal and natural gas. Although such an assessment demands an interdisciplinary approach to provide readers with important background information, the approach taken here is based upon the economics of the energy market. The empirical studies summarized here can be categorized into three groups: time series studies analyzing market integration between oil and other energy commodities, studies that examine the predictive content of futures prices for energy, and the role of tail risk in explaining price volatilities of oil and other energy commodities. Several suggestions for future research are offered

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.

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