Almukhtar S. Al‐Abri

Oil Price Shocks and Macroeconomic Responses: Does the Exchange Rate Regime Matter?

The sharp fluctuations in oil prices in recent years provide an opportunity to empirically test Friedmans hypothesis that flexible exchange regimes better absorb real external shocks. This paper empirically examines whether the responses of real output, consumer prices, interest rates and real exchange rates differ across exchange rate regimes. Since the effects of oil price shocks depend on whether the economy is a net importer or a net exporter of oil, the sample used in this study is composed of nine Organisation for Economic Cooperation and Development major oil�?importing countries. The results show that only consumer prices and real exchange rates exhibit relatively faster and smoother adjustment to their long�?run equilibrium when the adopted de facto exchange rate regime is flexible, supporting Friedmans hypothesis. Also, panel Granger causality tests suggest a feedback from real effective exchange rates and inflation rates to the real oil price, supporting the argument that oil price shocks are not purely exogenous to developed economies.

Indicators of business environment, institutional quality and foreign direct investment in Gulf Cooperation Council (GCC) countries

This paper empirically investigates the effect of five business environment indicators and four measures of institutional quality on FDI inflows in GCC countries. The empirical results reveal that the time required to start a business, the time required to enforce a contract, the time required to register a property and the time required to resolve insolvency are negatively and statistically significantly correlated with FDI inflows. Our findings also confirm that political instability and absence of democracy, in fact, encourages FDI inflows. We conclude that the business environment strongly matters for FDI inflows into the GCC countries.

Oil-Price Shocks and Macroeconomic Adjustments: Does the Exchange Rate Regime Matter?

The recurring oil-price shocks that hit all economies in the world provide an opportunity to empirically test Friedmans hypothesis that flexible exchange regimes better absorb real external shocks. Using a sample of nine of the OECDs major oil-importing countries and Reinhart and Rogoffs de facto classification of exchange rate regimes, this paper examines whether the response of real output, prices, interest rate, and the real exchange rate to real oil-price shocks differ across exchange rate regimes. The results show that price level and the real exchange rate exhibit smoother adjustment to their long-run equilibrium when the de facto exchange rate regime was flexible. The paper also finds feedback from the real effective exchange rate and inflation rate to the domestic-currency real oil-price, supporting the growing notion that oil-price shocks are not purely exogenous to developed economies.

Improved labour productivity is imperative for Oman’s economic diversification

This study measures sectoral labour productivity in Oman. Our findings indicate low as well as declining labour productivity across most sectors. Only Financial Intermediation shows some increases in labour productivity. We note that growth in most sectors was largely driven by fiscal spending rather than growth in labour productivity. The findings suggest that improving labour productivity and diversifying the economy can be both achieved by directing future expansions towards high-end industries, which can absorb the highly skilled and highly motivated workforce of Omanis.

National Saving and Terms-of-Trade: The Harberger-Laursen-Metzler Effect Revisited

This paper provides new evidence relating to the debate of whether long-lived TOT shocks affect saving rates using a sample of 56 developing countries for the period 1980-2010. The core aspect of the empirical analysis is to utilize the terms-of-trade (TOT) shock-duration and trend-growth measures that have not been considered in the previous empirical literature.

Labor Market Heterogeneity and Optimal Exchange Rate Regime in Resource-Rich MENA Countries

Although countries of the MENA region are commonly considered as primary-commodity economies, they show sharp dissimilarities in a number of dimensions. Two important dimensions are the size of resource-endowments and the degree of labor market flexibility. Countries such as members of the Gulf Cooperation Council (GCC) and Libya are highly oil-endowed economies with largely flexible labor markets and substantial remittances outflows. While the rest of the MENA countries, such as Egypt, Sudan, Yemen, Algeria, Iran and Iraq, show commonalities in terms of their relatively smaller oil-endowments and the lack of labor market flexibility. This chapter attempts to incorporate the role of labor market flexibility in a unified theoretical framework of optimal exchange rate policies. For that purpose, the paper extends the standard rules-vs.-discretion model of monetary policy to allow for different assumptions about wage rigidities. The analysis suggests that when all prices are exogenous and wages are all optimally indexed to inflation (i.e., labor market flexibility), fixed exchange rate regimes deliver more desirable outcomes in terms of real output, inflation, and insulation against external shocks compared to flexible exchange rate regimes. On the other hand, the fixity of exchange rates combined with rigid goods and labor markets can add to real appreciations.

Exchange Rate Pass-Through to Domestic Inflation in Gulf Co-Operation Council Countries

This paper provides estimates of the exchange rate pass-through to the quarterly Consumer Price Index (CPI) in five Gulf Co-operation Council (GCC) countries (Bahrain, Kuwait, Qatar, Oman, and Saudi Arabia) during the period 1999q1 to 2009q4. The degree of pass-through varies significantly across the five GCC countries. Consumer prices in Qatar, Saudi Arabia, and Bahrain show higher and faster response to exchange rate fluctuations as opposed to the findings of Kuwait and Oman. In all cases, over a one-and-half year span, the pass-through is complete for Qatar only. More interestingly, and despite the fact that the euro area is the major import partner to GCC countries, the empirical results revealed that the Japanese Yen/US dollar exchange rate matters more for CPI inflation in GCC countries than Sterling Pound/US dollar or Euro/US dollar. Variations in estimated pass-through are related to nominal exchange rate volatility, import openness, retail distribution channels, and subsidization programs by respective governments. These results have important policy implications given the GCC countries’ movement toward a common market and their efforts to achieve greater monetary policy coordination. In addition, the paper has policy implications for firms exporting to the GCC region.

Asset Prices, and Consumer Inflation in GCC Countries

The paper studies the interactions between credit, financial asset prices (namely equity prices), and consumer price inflation for the countries belonging to the Gulf Cooperation Council using quarterly observations from 1998:1 to 2009:4. The stock price is seen to have a positive and significant effect on CPI inflation only in the case of Qatar and Oman. Domestic credit comes out as an important determinant of inflation in the GCC countries. Oil price increases affect inflation positively in Oman and Kuwait and negatively in Saudi Arabia. The findings suggest a varying degree of wealth effect on aggregate demand in these countries. The findings of this study have important policy implications for the challenges of a common monetary policy for the GCC area mandated by the proposed common currency.