Razzak, W A (2007): In The Middle of the Heat:The GCC countries Between Rising Oil Prices and the Sliding Greenback.

PDF
MPRA_paper_6591.pdf Download (325Kb)  Preview 
Abstract
The paper asks two questions. One, what is the size of the effect of the increase in real oil price on competitiveness of the Gulf Cooperation Council (GCC) countries –the real exchange rate is a measure of competitiveness – and two, given recent concerns about the sliding greenback and the consequent income and inflationary problems, would the GCC countries been “better off” had they pegged their currencies to the Euro dollar in 1991? To answer these questions we model and estimate the effect of oil prices on the competitiveness for the GCC then we provide a test statistic to test whether the conditional variance of the model has remained stable under the US dollar peg compared to a counterfactual scenario, where the GCC countries peg their currencies to the Euro dollar in 1991. We find the effect of the increase in the real price of oil on competitiveness of the GCC countries to be small, most of the domestic inflation is imported, and that there is a relatively large variation among the GCC economies with respect to the currency peg. The financial problems the GCC countries 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 as a whole.
Item Type:  MPRA Paper 

Original Title:  In The Middle of the Heat:The GCC countries Between Rising Oil Prices and the Sliding Greenback 
English Title:  Same as above 
Language:  English 
Keywords:  Real Exchange Rate, Oil Price Shocks, Sample Generalized Variance 
Subjects:  C  Mathematical and Quantitative Methods > C1  Econometric and Statistical Methods and Methodology: General > C13  Estimation: General P  Economic Systems > P2  Socialist Systems and Transitional Economies > P28  Natural Resources; Energy; Environment F  International Economics > F3  International Finance > F31  Foreign Exchange 
Item ID:  6591 
Depositing User:  Weshah Razzak 
Date Deposited:  06. Jan 2008 16:54 
Last Modified:  13. Feb 2013 18:45 
References:  Anderson, T. W., 1958, An Introduction to Multivariate Statistical Analysis, New York, John Wiley. Balassa, B., 1964, “The Purchasing Power Parity Doctrine: A Reappraisal,” Journal of Political Economy 72, 584596. Dornbusch, R., 1976, “Expectations and the Exchange Rate Dynamics,” Journal of Political Economy 84 (December), 116176. Edward, S., 1989, ‘UReal Exchanges Rates, Devaluation, And AdjustmentsU, Cambridge, Massachusetts, MIT Press. Egert, B., L. Halpern, and R. MacDonald, 2004, “Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues,” Centre for Economic Policy Research Discussion Paper No. 4809 (London, Centre for Economic Policy Research Discussion Paper). Elliott G., 1999, “Efficient Tests for Unit Root When the Initial Observation is Drawn from its Unconditional Distribution,” International Economic Review 140:3, 767783. Fama, E., 1970, “Efficient Capital Markets: A Review of Theory and Empirical Work,” Journal of Finance 25, 383417. Frenkel, J., 1976, ”A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence,” Scandinavian Journal of Economics 78 (May), 200224. Froot, K. and K Rogoff, 1991, “The EMS, The EMU, and the Transition to a Common Currency,” National Bureau of Economic Research Working Paper No. 3684 (Cambridge, Mass, NBER). Ganadesiken, M. and S. S. Gupta, 1970, “A Selection Procedure for Multivariate Normal Distribution in Terms of the Generalized Variance,” Technometrics, 12, 103116. Harrod, R., 1933, UInternational EconomicsU, London, James Nisbet and Cambridge University Press. Im, K. S., M. H. Pesaran, and Y. Shin, 2003, “Testing for Unit Root in Heterogeneous Panel,” Journal of Econometrics 115, 5374. Levin, A., C. F. Lin and C. S. Chu, 2002, “Unit Root Tests in Panel Data: Asymptotic and Finite Sample Properties,” Journal of Econometrics 108, 124. Meltzer, A., 1993, “Real Exchange Rates: Some Evidence from the Postwar Years,” Review Federal Reserve Bank of St. Louis, 103117. Messe, R. and K. Rogoff, 1983, “Empirical Exchange Rate Models of the Seventies: Do they fit out of Sample?” Journal of International Economics 14, (February), 324. Mundell, R., 1961, Theory of Optimum Currency Areas, American Economic Review, Vol. 51 No. 4, 657665. Mussa, M., 1986, “Nominal Exchange Rate Regimes and the Behaviour of Real Exchange Rates: Evidence amd Implications,” Carnegie Rochester Conference on Public Policy, (Spring 1987), 956. Mussa, M., 1982, “A Model of Exchange Rate Dynamics,” Journal of Political Economy, 90 (February), 74104. Obtsfeld, M., J. C. Shambaugh and A. M. Taylor, 2005, “The Trilemma in History: Tradeoffs among Exchnage Rates, Monetary Policies and Capital Mobility,” Review of Economics and Statistics, Vol. 87 issue 3, 423438. Oomes N. and K. Kalcheva, 2007, “Diagnosing Dutch Disease: Does Russia Have the Symptons?” IMF Working Paper WP / 07/ 102. Perron, P., 1997, “Test of Unit Root with Endogenous Time Break,” Journal of Econometrics, 80. Phillips, P. C. B., 1987, “Time Series Regression with a Unit Root,” Econometrica 55, 277301. Razzak, W. A., 1994, Foreign Exchange Rate Markets: An Alternative Test Based on the Sample Generalized Variance, PhD thesis, North Carolina State University, UMI Dissertation Services, A Bell & Howell Company, Ann Arbor, Chicago. Razzak, W. A., 1995, “Are Devaluations Effective in Inducing Real Depreciations in SubSaharan Africa?” Applied Economics Letters 2, 437439. Samuelson, P., 1964, “Theoretical Notes on Trade Problems,” Review of Economics and Statistics 46, 145154. Said, S. E. and D. A. Dickey, 1984, Testing for Unit Roots in Autoregressive Moving Average Models with Unknown Order, Biometrika 71, 599607. Sarno, L. and M. Taylor, 1998, “Real Exchange Rates Under the Current Float: Unequivocal Evidence of Mean Reversion,” Economics Letters 60, 131137. Taylor, M. and L. Sarno, 1998, “The Behaviour of Real Exchange Rates During the PostBretton Woods Period,” Journal of International economics 46, 281312. 
URI:  http://mpra.ub.unimuenchen.de/id/eprint/6591 