Transmission of world price shocks - Evidence from GCC countries

This study examines whether the positive and negative shocks in world commodity prices transmit symmetrically to the domestic prices of GCC economies while using threshold autoregressive (TAR) model. The empirical results indicate that the positive shocks in world prices do transmit to the domestic prices of these economies whereas, the negative shocks are not transmitted. Moreover, for certain commodity-groups, which respond to both positive and negative shocks, the speed of transmission is relatively faster with respect to the positive shocks as compared to negative shocks. These findings indicate that the agents in these economies prefer to choose inaction in response to negative world price shocks whereas, the positive shocks of even smaller size trigger quicker upward adjustments in the domestic prices. Consistent with the predictions of menu cost models, these results imply that the shocks in world prices which raise the desired level of domestic prices, cause quick and large increase in domestic prices whereas the shocks that lower the desired prices, cause a small or no decrease in these prices. These results underline the fact that despite adopting a number of trade reforms, the markets of these economies are still characterized with lower degrees of competitiveness, higher imperfections and other related inefficiencies.