THE TRANSMISSION OF INTERNATIONAL INFLATION IN SMALL OPEN ECONOMIES: A CASE STUDY ON GULF COOPERATION COUNCIL COUNTRIES

This study investigates the transmission of international inflation in small, open economies. The study emphasizes the inflation transmission in Gulf Cooperation Council (GCC) countries both theoretically and empirically.; In developed countries, imported inflation was found to be associated with the degree of dependence upon imported oil. In many developing countries, and especially in the case of small, open economies a significant portion of domestic inflation has been resulted from international price variation and other external factors. However, the internal factors were believed to overweigh the effects of external effects.; The study also provides empirical analyses of GCC during the period 1973-1992 using the pooling techniques. The study found that effect of changes of prices in developed countries (inflation) was found to be much looser or more elusive than has been assumed in previous studies. Other variables such as change in money supply, increase in government spending, shift in domestic and foreign demand and balance of payments surplus were found to be significantly affecting domestic inflation. The study found that the transmission of international inflation to GCC countries during the period 1973-1992 existed. The channels through which it was transmitted are the monetary channel, the increase in foreign demand and the direct price effect. However, as we mentioned before the internal factors such as money supply and an increase in government spending are more significant and ought to be more responsible for the acceleration of inflation rate in the GCC countries.; The study suggested some policy recommendations that might help the policy maker in GCC countries to reduce the high vulnerability of these economies to external shocks and achieve internal stability. These recommendations include: (1) The encouragement of intra-trade among GCC countries. (2) The proper management to both fiscal and monetary policies. (3) The encouragement of policies that aim to improve and strengthen the productive structure of the GCC economies.