Lost in Transmission The Effectiveness of Monetary Policy.pdf

WP/12/191 Lost in Transmission? The Effectiveness of Monetary Policy Transmission Channels in the GCC Countries Serhan Cevik and Katerina Teksoz © 2012 International Monetary Fund WP/ 12/191 IMF Working Paper Middle East and Central Asia Department Lost in Transmission? The Effectiveness of Monetary Policy Transmission Channels in the GCC Countries Prepared by Serhan Cevik and Katerina Teksoz Authorized for distribution by Ralph Chami July 2012 This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Abstract This paper empirically investigates the effectiveness of monetary policy transmission in the Gulf Cooperation Council (GCC) countries using a structural vector autoregressive model. The results indicate that the interest rate and bank lending channels are relatively effective in influencing non-hydrocarbon output and consumer prices, while the exchange rate channel does not appear to play an important role as a monetary transmission mechanism because of the pegged exchange rate regimes. The empirical analysis suggests that policy measures and structural reforms—strengthening financial intermediation and facilitating the development of liquid domestic capital markets—would advance the effectiveness of monetary transmission mec