In The Middle of the Heat:The GCC countries Between Rising Oil Prices and the Sliding Greenback

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.