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Volume :7 Issue : 1 2000      Add To Cart                                                                    Download

The Behavior of the Exchange Rates of An Oil Rich State, and Implications for Market Efficiency and Monetary Policy

Auther : Ahmed S. Al-Refai

A news model is estimated within a GARCH-M to examine the behavior of exchange rates in Kuwait. The model utilizes a unique data set consisting of observations on relevant domestic and international macroeconomic variables. The results indicate that the local exchange market is efficient in the sense that excess profit could not be generated from past information. The evidence also reveals that the domestic currency is effectively pegged to the U.S. dollar in the long run, and is freely floating against the other major currencies. In the short run, however, the dinar/dollar exchange rate may exhibit significant variations. Thus, the Kuwaiti dinar might be pegged to a basket of currencies, and the dollar seems to be the dominant currency in this basket. Hence, foreign trade and investments favor the U.S. markets. The current exchange rate policy of Kuwait, however, is only sustainable in the long run if the real growth in the local economy is not significantly less than that of the U.S. Thus, the growth in real economic activity in the U.S. market should be a relevant economic target.

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