Inflation Dynamics in GCC Countries (Work in Progress)

This paper studies the determinants of inflation in GCC countries. Using a Global VAR model which incorporates trade linkages, we analyze how regional and global factors affect inflation dynamics in GCC. We find that non-GCC demand factors including changes in nominal interest rates, money supply growth, and the nominal effective exchange rate of trading partners contribute the most to the fluctuation of inflation. We also find that oil price shocks will have a limited effect on inflation if money supply growth in GCC countries is controlled. Finally, among GCC's major trading partners, Emerging Asia and China play a significant role in the variation of inflation.