| In this dissertation, our goal is to estimate a model that explains the behavior of inflation for Saudi Arabia, Oman, Bahrain, Qatar, Kuwait, and the United Arab Emirates (all GCC countries), as well as inflation's main causes. We use the Vector Error Correction (VEC) model, because it considers both the long and short run behavior of inflation. In addition to the VEC model, we estimate a Vector Autoregressive model (VAR) to compare the short run predictions of both the VEC and VAR models.;By employing different specifications, we found a good VAR and VEC model for every country. In general the important internal causes of inflation in the GCC countries are government spending and money growth that has positive effect on inflation. However some GCC countries show negative effects. This is not what standard theory predicts so these needs further research. For the external factor that affects inflation we found the nominal effective exchange rate to be significant. |
