Evaluating the Effects of Monetary Policy Shocks on Aggregate Demand Components in GCC Countries: Evidence from Svar

Abstract

In this research, for first time effects of monetary policy shocks on aggregate demand components with a baseline of structural vector autoregressive (SVAR) models are evaluated in GCC countries. SVAR Results explain, when fix capital formation included in model, contemporaneous coefficients indicates that in most countries (except Kuwait) the interest rate responds positively to unexpected increase in monetary aggregate. The opposite side of the story is also true, broad money decreases with an unexpected increase in an interest rate. Furthermore, monetary policy interest rate (except Kuwait) especially between 1 to 4 years has the more effect on investment compare to other components of GDP in the case of GCC states. Findings indicate in GCC states, investment is first and remain components of GDP is second variable that mostly affected by monetary policy shocks. Most effects of monetary policy on investment are seen in Saudi Arabia, Qatar and Oman.

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