Exchange rate and domestic prices in the gcc countries

Abstract EN

This research aims at studying the effect of changes in the exchange rate on domestic prices in the GCC countries.

The methodology is based on specifying and estimating domestic price equations where the exchange rate is included as a major explanatory variable.

We also consider the wage-price spiral in order to investigate how inflation rates rise following a given devaluation.

The results of the research suggest that the a rise in import prices, following a given devaluation, has a significant effect on domestic prices in the GCC countries.

In this respect, it is found that a 10 per cent devaluation would cause a 2.1 – 7.4 per cent rise in domestic prices.

Policy makers must take this into account when they design different economic policies.