Financial stability and monetary policy reaction: Evidence from the GCC countries

Ahmed Elsayed, Nader Naifar and Samia Nasreen

The Quarterly Review of Economics and Finance, 2023, vol. 87, issue C, 396-405

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.

Keywords: Financial stability; Monetary policy; Taylor rule; GCC countries (search for similar items in EconPapers)
JEL-codes: C32 E44 E52 E58 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Financial Stability and Monetary Policy Reaction: Evidence from the GCC Countries (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:87:y:2023:i:c:p:396-405

DOI: 10.1016/j.qref.2022.03.003

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