Channels and environments of monetary policy and their implications for its conduct in GCC countries

This chapter addresses the transmission mechanism channels and the environments of monetary policy in the Gulf Cooperation Council (GCC) countries to study their implications for monetary policy strategy and conduct. These countries comprise Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). The monetary policy pursued in these countries revolves around pegging their national currencies to the US dollar, except for Kuwait which has been pegging against an undeclared basket of currencies since 2007. In this respect, GCC members believe that the peg provides an anchor for monetary policy aimed at achieving price stability. To preserve the national currency-dollar fix, domestic interest rates have been adjusted in line with US interest rates. This monetary policy framework prevents both the exchange rate and to a lesser extent the interest rate from acting as channels for the transmission of monetary policy. In addition, this group of countries is working on establishing a Gulf Monetary Union in the next decade, with a common currency. This union may require a different monetary policy framework, which will affect the transmission mechanism of monetary policy.