Global and Domestic Shocks on Inflation and Economic Growth and Membership Expansion in the GCC Bloc

Using a modern structural VAR with block exogeneity and identifying restrictions, this paper analyzes: first, the global macroeconomic linkages among the dollar exchange rate, oil price, China’s producer price, U.S.’s export price, EU’s export price and Japan’s export price; and second, the effects of global and country-specific shocks on the industrial production and consumer price indices of selected incumbent GCC member countries -Kuwait, Oman, Saudi Arabia- and the potential member Jordan. It also investigates which individual global/local shocks command more importance in explaining the variations in the economic growth and inflation of each actual and potential GCC members. It finally analyzes the similarities in economic growth and inflation among GCC countries after controlling for different global and country-specific shocks. The results suggest that the overall CPI inflation rates of Kuwait, Oman, Saudi Arabia and Jordan are highly and positively correlated. The economic growth of Jordan shows negative correlations with those of the member countries. If GCC members are to focus only on stabilizing inflation, there is no harm for them to accept Jordan as a new GCC member. If GCC’s objective is, however, not only the stabilization of inflation but also the business cycle synchronization, GCC members should be more caution in accepting Jordan as a new member.