Spillovers from monetary policy in the US could be significant for the GCC countries those have pegged exchange rate regimes to the US dollar. In terms of GCC specific studies, an increase of 150 basis points in the federal funds rate was found to decrease non-oil activity in the GCC by 1.5 percentage points two years after the 2008 financial shock, according to an IMF Working Paper released on Friday.
The research note, arguably the first attempt to study the impact of the US monetary policy spillovers on oil-exporting economies, suggests that at a real oil price of $35 a barrel, a 100 basis-point increase in the US real policy interest rate leads to a drop in annual non-oil real GDP growth of a 1/3 percentage point.
If the real oil price, however, were $30 a barrel, the same 100 basis-point increase in the US real policy interest rate would lead to a decrease in the annual non-oil real GDP growth rate of almost 2/3 percentage point. The spillover from US monetary policy disappears when the real oil price rises above $43 a barrel.
Against this background, the paper investigates how oil prices affect US monetary policy spillovers to non-oil GDP growth in the GCC countries.
Specifically, GCC countries’ non-oil real GDP growth rates are modeled using panel models with the US real interest rates and the real oil price as explanatory variables.
The focus is on non-oil real GDP instead of the total real GDP. This allows for a cleaner identification of the monetary policy spillovers, given the oil component of the GDP is largely driven by production decisions made on the basis of developments in the global oil market.
GCC policy rates broadly follow US interest rates. During the past three years, most GCC central banks have been moving domestic policy rates in line with the US Federal Reserve which is consistent with previous US tightening and easing cycles.
GCC countries depend significantly on oil as their main source of export and fiscal revenues. Between 2013–17, the average contribution of the oil sector to the total GCC GDP was 35 percent. Oil contributed about 62 percent of GCC exports and 72 percent of GCC government revenues. Since oil forms a large component of exports and government revenue, it has a strong relationship with the current account and fiscal positions of GCC countries.
The paper also analyses the growth impact of a change in US monetary policy on the GCC countries, specifically the impact of the US real interest rate and the US real GDP growth on the non-oil real GDP growth in GCC using a panel regression with fixed effects and establishes that the spillovers from US monetary policy to GCC countries can be significant.
“There is evidence….. that the level of oil prices matters for how changes in US interest rates affect non-oil GDP growth in the GCC. Oil price-driven liquidity fluctuations impact the effects of monetary policy on non-oil growth. At current oil price levels, the impact of changes in US interest rates on non-oil growth in the GCC appear likely to be minimal,”, the report noted.
