Higher oil prices dampened impact of Fed spillovers in Gulf – IMF paper

Higher oil prices can significantly dampen the spillover effects of US monetary policy on Gulf economies, a paper published by the International Monetary Fund finds.

Olumuyiwa Adedeji and co-authors examine how oil prices affect US monetary policy spillovers on non-oil GDP growth in Gulf Cooperation Council economies. They study GCC commercial bank excess reserves, oil price levels and interest rate data from 2004–18.

They find that an increase in US interest rates of 100 basis points reduces non-oil real GDP in GCC countries by more when the price level of oil is lower. Specifically, if the price of oil was $35 a barrel, the sector’s annual growth rate would fall by a third of a percentage point, but with prices at $30 a barrel, the growth rate would fall almost two-thirds of a percentage point, they find.

The fact that oil prices have remained above $43 a barrel since 2004, the authors say, has weakened the effect of US monetary policy relative to the 1990s, when prices were lower.

“At current oil price levels, the impact of changes in US interest rates on non-oil growth in the GCC appear likely to be minimal,” they conclude.