Question

In: Economics

write a report why spillovers from U.S. monetary policy to non-oil GDP growth in the GCC...

write a report why spillovers from U.S. monetary policy to non-oil GDP growth in the GCC countries depends on the level of oil prices.

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Solutions

Expert Solution

As per report by IMF, increase in 1.5 percent of interest rates by US Fed leads to decrease in activity of non oil countries to 1.5 percent because GCC countries rely on oil as fiscal revenue sources and forex reserves.oil. Cintributes 62 percent of GCC exports while 71 percent of revenues and thus oil has profoujd effects on interest rates and thus countries tend to move interest rates in tandem with US.

With empirical evidence it is proven that range of oil prices move ij concordance with interest rates and thus have effects on spillovers of monetary policy transmission on non oil growth of GCC countries.

Thus when oil prices decrease the fiscal revenues decrease and thus exports increase and thus the real exchanges rate also appreciates causing interest rates to go up. This how correlation of oil and interest rates have dominated the growth of GCC countries.

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