Financial Stability and Monetary Policy Reaction: Evidence from the GCC Countries

Elsayed, Ahmed H.; Naifar, Nader; Nasreen, Samia

doi:10.1016/j.qref.2022.03.003

Financial Stability and Monetary Policy Reaction: Evidence from the GCC Countries

Elsayed, Ahmed H.; Naifar, Nader; Nasreen, Samia

Authors

Dr Ahmed Elsayed ahmed.elsayed@durham.ac.uk
Associate Professor

Nader Naifar

Samia Nasreen

Abstract

This paper investigates the interaction between monetary policy and financial stability in the Gulf Cooperation Council (hereafter GCC) countries by introducing a new composite financial stability index to monitor the financial vulnerabilities and crisis periods. To this end, the study estimated monetary policy reaction functions for each GCC country (namely, Bahrain, Kuwait, Saudi Arabia, and the United Arab Emirates) using the Nonlinear Autoregressive Distributed Lag Model (NARDL) over the period from 2006-Q4 to 2020-Q2. Empirical findings indicate that monetary authorities' response to the deviation of inflation from their target level, output gap, or exchange rate movement differ in magnitude, sign, and significance across the GCC countries. The results further explain that monetary authorities react significantly to negative or positive shocks to financial stability, but they react differently in the short or long term. Overall, an augmented Taylor rule including financial stability as an additional monetary policy target is more appropriate for the GCC countries.

Citation

Elsayed, A. H., Naifar, N., & Nasreen, S. (2023). Financial Stability and Monetary Policy Reaction: Evidence from the GCC Countries. The Quarterly Review of Economics and Finance, 87, 396-405. https://doi.org/10.1016/j.qref.2022.03.003

Journal Article Type	Article
Acceptance Date	Mar 10, 2022
Online Publication Date	Mar 14, 2022
Publication Date	2023-02
Deposit Date	Mar 15, 2022
Publicly Available Date	Mar 7, 2023
Journal	Quarterly Review of Economics and Finance
Print ISSN	1062-9769
Publisher	Elsevier
Peer Reviewed	Peer Reviewed
Volume	87
Pages	396-405
DOI	https://doi.org/10.1016/j.qref.2022.03.003
Public URL	https://durham-repository.worktribe.com/output/1211941

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http://creativecommons.org/licenses/by-nc-nd/4.0/

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© 2022. This manuscript version is made available under the CC-BY-NC-ND 4.0 license https://creativecommons.org/licenses/by-nc-nd/4.0/