Asymmetric Exchange Rate Pass-Through Effects on Prices in the Gulf Cooperation Council (GCC) Countries (NARDL Approach)

Abstract

Abstract: For decades, the exchange rate has held strategic significance in both microeconomic and macroeconomic dimensions of national economies. Exchange rate fluctuations have become a principal determinant in shaping the behavior of markets, governments, households, and firms, continuously directing macroeconomic variables—including inflation, liquidity, production, exports, imports, consumption, investment, aggregate demand, and aggregate supply—toward the formation of new equilibriums. These recurrent transitions toward new equilibriums, in turn, serve as a destabilizing force in the economy. The aim of this study is to conduct a comparative analysis of exchange rate pass-through effects on prices in the Gulf Cooperation Council (GCC) countries (including Iran, Iraq, Saudi Arabia, the United Arab Emirates, Bahrain, Kuwait, Qatar, and Oman) over the period from 1990 to 2022. Accordingly, to perform a cross-country comparative analysis, the study employs the nonlinear autoregressive distributed lag (NARDL) model. The findings indicate that a positive exchange rate shock (exchange rate appreciation) leads to an increase in prices, while a negative exchange rate shock (exchange rate depreciation) results in a decrease in prices across the GCC countries, both in the short run and the long run. Therefore, a direct and statistically significant relationship exists between exchange rate shocks and price levels in the GCC countries in both time horizons. Furthermore, variables such as the import price index, money supply, and global oil prices exhibit a positive and significant impact on price levels in the GCC region in both the short term and long term.