Impacts of global and domestic shocks on inflation and economic growth for actual and potential GCC member countries Won Joong Kim a , Shawkat Hammoudeh b, ⁎ a Department of Economics, Konkuk University, Republic of Korea b Lebow College of Business, Drexel University, United States article info abstract Article history: Received 20 April 2012 Received in revised form 26 October 2012 Accepted 29 October 2012 Available online xxxx By using a modern structural VAR with block exogeneity and identifying restrictions, this paper analyzes several global and regional oil and macroeconomic relationships related to the selected incumbent GCC member countries – Kuwait, Oman, Saudi Arabia – and the potential member Jordan. First, it examines 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. Second, it investigates the effects of global and country-specific shocks on the industrial production and consumer price indices of these GCC member countries and the potential member Jordan. It thereby examines which individual global/local shocks command more importance in explaining the variations in the economic growth and inflation of each actual and potential GCC member. Third, it analyzes the similarities in economic growth and inflation among the 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 the GCC members are to focus only on stabilizing inflation, there is no harm for them to accept Jordan as a new GCC member. However, if the GCC's objective is not only the stabilization of inflation but also the business cycle synchronization, the GCC members should be more cautious in accepting Jordan as a new member. © 2012 Elsevier Inc. All rights reserved. JEL classification: E3 F4 Keywords: Structural VAR Block exogeneity Export prices Oil price Pass-through 1. Introduction The economies of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates (UAE) are similar in many ways. These economies are part of the Gulf Cooperation Council (GCC), and these have experienced increased integration for the last three decades (Kim, Hammoudeh, & Alesia, 2012), have effectively pegged their currencies to the U.S. dollar and have had open capital accounts. 1 They are highly dependent on oil production and exports for generating government revenues driven by an oversized public sector which is significantly manpowered by foreign labor. Moreover, many of these countries possess large endowments of foreign assets because of spurts of large oil revenues over the years, compared to their relatively narrow absorptive capacity which is hydrocarbon-based (Hammoudeh et al., 2009). They also share the same geographic area, language, climate and culture. However, the GCC countries are dissimilar in other important ways including economic growth and inflation, which are not always commensurate with the individual country's oil revenue prowess. Over the last two decades, the small oil producer Oman achieved the International Review of Economics and Finance xxx (2013) xxx–xxx ⁎ Corresponding author. E-mail addresses: terrykim01@gmail.com (W.J. Kim), hammousm@drexel.edu (S. Hammoudeh). 1 Kuwait pegs its currency to a basket of major currencies that closely follows the U.S. dollar. REVECO-00790; No of Pages 20 1059-0560/$ – see front matter © 2012 Elsevier Inc. All rights reserved. http://dx.doi.org/10.1016/j.iref.2012.10.009 Contents lists available at SciVerse ScienceDirect International Review of Economics and Finance journal homepage: www.elsevier.com/locate/iref Please cite this article as: Kim, W.J., & Hammoudeh, S., Impacts of global and domestic shocks on inflation and economic growth for actual and potential GCC..., International Review of Economics and Finance (2013), http://dx.doi.org/10.1016/j.iref.2012.10.009