Journal of Applied Sciences

Year: 2014 | Volume: 14 | Issue: 24 | Page No.: 3410-3423
DOI: 10.3923/jas.2014.3410.3423

Determinants of the Real Exchange Rate as a Prerequisite for the GCC Monetary Union

Hassan Al-Hajhoj, Abdulrazzak Charbaji and Mohammad Safarzadeh

Abstract: Monetary union plays an important role in introducing a single currency among the member states in a similar geographical region. It is therefore, necessary to analyze economic factors that lead to the establishment of monetary union in the Gulf Cooperation Council (GCC) through real exchange rate. The main aim of this study was to investigate the determinants of the Real Exchange Rate (RER) across the Gulf Cooperation Council (GCC) countries as a prerequisite for establishing a monetary union. To achieve this goal, different econometric techniques such as the Vector Error Correction (VEC) etc., were applied. Firstly, each relevant economic variable was tested according to the standard Augmented Dickey-Fuller (ADF) unit root test in order to be able to apply. Secondly, the Engle-Granger two-step co-integration method was applied to determine the appropriateness of using the VEC for each GCC country. The results indicated that the most economic variables in the study have one order of integration. The study also showed that GCC countries have different economic variables that determine the RER. The study results indicated that the estimated error correction coefficients were not significant for all the GCC countries except the state of Qatar where the growth in RER will deviate by -0.240808 in the short term. The study highlighted the various determinants of RER helpful to establish monetary union in the GCC countries.

Keywords: vector error correction, real exchange rate, regression, GCC countries and Co-integration

INTRODUCTION

The Gulf Cooperation Council (GCC) was established in May 1981 among the six Arab countries of the Gulf region namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). One of the major objectives of establishing the GCC was to unify the states economically through the establishment of a monetary union. Therefore, this study investigated and analyzed the key economic determinants of the Real Exchange Rate (RER) in the GCC countries as a guideline to establish the expected GCC monetary union, because the RER plays a significant role in the growth of an economy. The ultimate aim of this monetary union was to introduce a single currency into the member states. There was a support for the introduction of this single currency as the member countries of the GCC’s monetary union share similar characteristics such as the region’s common history, the language, the relative homogeneity between the political systems and traditions and most importantly the similarity in economic structure among the member states. The economic structure of all the GCC member states is strongly dominated by the production of oil and gas. In order to adopt a single currency, the GCC countries were building up monetary convergences over recent decades as revealed by the high degree of exchange rate stability, predominantly low inflation rates and co-moving interest rates.

There have been several theoretical and empirical studies of the RER in developed and developing economies. In this study, the researchers faced the challenge of determining the economic factors that will affect the RER of each GCC country. The researchers tried to find the common factors among the six GCC countries that will lead to the development of a monetary union within the GCC countries. Therefore, some of the studies that tried to specify the determinants of RER were summarized as follows.

According to Bruno (1976), the RER depended on the domestic interest rate, an excess of domestic demand and a current account deficit. While Obstfeld (1984) reported the factors that affect the RER in the long term, such as the removal of capital control, excess domestic demand and the size of the current account. Edwards (1988) applied an econometric model to 12 developing countries from 1962-1985 and found six economic factors that affected the RER in the long term. These factors included the capital accumulation, the exchange of trade controls, control of capital flows, government consumption, technological progress and the terms of trade.

The signs of the estimated coefficients were found to be negative except those of the capital accumulation and technological progress factors which positive. Gavin (1992) presented a model which showed a positive relationship between net foreign assets (NFAs) and RER. Some investigators presented built univariate econometric models that included imports and capital flows, the terms of trade and the degree of openness of the economy as determinants of the RER (Ghura and Greenes, 1993; Aron et al., 1997).

Overall, the population of GCC countries was 43.2 million in 2011. Figure 1 shows that Saudi Arabia represents 65% of the total population of the GCC countries comprising around 28 million inhabitants. The GDP of the GCC countries reached 1,386 trillion dollars in 2011. Figure 2 illustrates that Saudi Arabia and the UAE have the largest share of the GDP among the GCC countries representing 42 and 26%, respectively. The UAE is the second largest country in terms of population and GDP (Fig. 1 and 2). Figure 2 also shows that Bahrain had the lowest share of GDP representing only 2% of the total GDP of the GCC countries. However, in terms of GDP per capita, Fig. 3 demonstrated that the population plays an important role in the size of the GDP per capita. For example, a country with a high overall GDP might have low GDP per capita due to the size of the population. For example, Overall the GDP of Saudi Arabia is the highest, but it is the lowest GDP per capita among the GCC countries. Figure 3 shows that the GDP per capita of Qatar was the highest among the GCC countries as well as in the world in 2011 due to the fact that its economy grew by almost 19%. The State of Qatar was considered to be the fastest growing economy worldwide (World Bank, 2012).

Furthermore, all the GCC economies still depend heavily on exports, especially of oil and gas. Figure 4 shows the export of goods and services as the percentage of GDP ranging from 46% in Qatar to 96% in Bahrain. This indicates the important role of trade openness in the development process of the GCC economies. It is also important for the exchange rate mechanism and for currency unification.

In addition to the aforementioned factors, the analysis highlighted certain economic and financial indicators of the GCC countries from 2000-2011. The change in the real GDP of the GCC countries is presented in Table 1. It can be visualized from the data in Table 1 that most of the GCC economies enjoyed positive growth, especially during the period from 2003-2008. The prosperity of the GCC economies may be attributed to the recovery of the world economy which, in turn, increased the demand for oil products. Therefore, the increase in oil production and high oil prices are reflected in the growth of the GCC economies. Table 1 indicates that Qatar observed the highest growth rate in GDP (26.17%) in 2006. Also, The State of Qatar showed the highest growth rate in real GDP among the GCC economies from 2000-2011. In 2008, Oman became second in terms of real GDP growth. In spite of the high rate of growth in the real GDP across the GCC economies in 2008, The year 2009 saw a considerable drop in the real GDP growth rate for all GCC economies. Kuwait and the UAE faced negative growth in their economies (-5.15 and -3.28%, respectively). However, the following years showed an improvement among all the GCC countries. Of course, the international financial and economic crises in 2008 affected all of the GCC countries and this is evident in the performance of the GCC economies in 2009. The effect of the international economic crisis did not come as a surprise on the GCC economies because the GCC countries depend heavily on international trade. Thus, any downturn in the world economy will affect the GCC economies through the trade sector. The growth rate of the real GDP in the GCC countries ranged, on average, from 9.3% (2006) to 1.3% (2009). While, the average growth rate of the GCC economies was almost 5.8% from 2000-2011 and was considered high as compared to the economy of other regions in the same period (IMF, 2012a).

Table 2 illustrates the trend in the inflation rate for the last decade in the GCC economies. The inflation rates in the GCC countries was very low from 2000-2004 except the State of Qatar in 2004. Indeed, some economies, such as those of Bahrain, Oman and Saudi Arabia showed negative inflation rates during the first two years of the last decade. But starting from 2005-2008, the inflation rate rose dramatically across all the GCC economies except Bahrain showed moderate inflationary pressures influencing the rates which ranged from 1.63% in 2003 to 3.53% in 2008. The inflation rate of Bahrain declined to 0.95% in 2011. The remainder of the GCC countries suffered from the inflationary pressures that appeared to affect the real GDP per capita thus reducing the real income of the countries’ inhabitants. The inflation rate in most of the GCC countries in 2008 reached above 10% and was considered to be unprecedented.

For example, in 2008, inflation reached 15.05, 12.52 and 12.25% in Qatar, Oman and the UAE, respectively. Moreover, the average inflation rate in all the GCC countries was 10.65% from 2000-2011. The rate of inflation started to decrease slowly from 2009-2011 due to the international financial and economic crises that affected the demand side of economies worldwide. Khan (2008) attributed the low and moderate inflation rate experienced from 2000-2004 to the imported monetary discipline embodied in the pegged exchange rate regime and which was underpinned by the open trade regime, the flexibility of the labor market, the existence of a prudent fiscal policy and the presence of benign global inflationary conditions. Also, Khan (2008) indicated that the policy of investing some of the oil export revenues outside the GCC countries’ financial systems helped to contain the monetary expansion. On the other hand, the rising inflationary pressures in the GCC countries were due to increase in oil prices, the expansion of monetary policies and imported inflation (Alhajhoj, 2010). Whereas, Sturm et al. (2008) stated that:

Khan (2008) argued that the inflationary pressures in the last decade were also due to the depreciation of the US dollar against other major currencies as well as to a monetary policy that was tied to that of the US where the Federal Reserve’s recent interest rate policy has highlighted the divergence in business cycles between the GCC countries and the US.

Table 3 illustrates the volume of imports of goods and services in the GCC countries as the percentage change. The data showed some fluctuations in the percentage change in the volume of imports, especially in the first few years of the last decade. There seemed some negative changes in the first and last few years of the last decade. These fluctuations supported the aforementioned rationale behind the trends observed in the rates of inflation. The data in Table 3 shows that the average percentage change in the volume of imported goods and services in the GCC countries reached its highest level of 20.78% in 2007.

The increase in imports was primarily due to the expansion of the GCC real economies that took place from 2004-2006. The rapid growth in real GDP increased demand to the extent that it could not be covered by the domestic supply alone and led to an increase in importing the goods and services to meet this gap. It is worth mentioning that Qatar had an average increase of 50% in the import volume of goods and services during 2005 and 2006. The international financial and economic crises showed some effects on the trends observed in the import volume in the GCC countries as visualized from the negative percentage change in import volume in 2009.

Regarding the volume of exports of goods and services, the export volume of the GCC countries increased from 321 billion dollars in 2005 to 654 billion dollars in 2008. However, in 2009, the export volume decreased to 443 billion dollars (GCC, 2011). Besides, most of the exports in the GCC countries depend heavily on oil and gas and the demand for oil and gas is affected by the GDP growth rate of the world. Between 2005 and 2008, the average global GDP growth rate was around 3.25% while in 2009, the growth rate of the world’s GDP was -2.3% (World Bank, 2012). Therefore, the volume of exports and services was affected by the world economy. Table 4 shows the percentage change in the volume of exports and services in the GCC countries. It demonstrates that the percentage change in exports and services was at peak from 2003-2005. Table 4 also illustrates that all the GCC countries showed negative percentage changes in 2009 except Qatar which showed a positive percentage change in terms of the volume of exports. Therefore, the recession in the world economy negatively affected most of the GCC countries in the export sector because these countries heavily depend on oil exports representing almost three-quarters of their total exports. However, Qatar depends on gas exports more than oil exports and therefore, the world recession had little impact on its economy. However, in 2010, the percentage change of exports increased in all the GCC countries.

Furthermore, Table 5 analyzed the value of oil exports from 2000-2011 in the GCC countries. It is clear from the table that the value of oil exports in the GCC countries tended to increase from 2000-2008. However, in 2009, there was a drop in the value of exports in all the GCC countries. To analyze the trend in the value of oil exports, it is important to study the data relating to oil demand and oil prices. Worldwide oil demand increased from 76.87 million barrels per day in 2000 to 86.38 million barrels per day in 2008 (IEA, 2012). The world demand for oil dropped to 85.20 million barrels per day in 2009 due to the effect of the financial and economic crisis which led to the world economic recession. In 2010, the world demand for oil increased again and reached 87.36 million barrels per day due to improvement in the world economy (the world GDP growth increased to 4.2%).

The oil prices also followed the same trend as the world oil demand. Oil prices reached their highest level of $91.48 per barrel. However, the price of oil decreased to $53.48 per barrel in 2009 while in the following years the prices started to increase again and reached $87.04 per barrel (IEA, 2012).

The GCC countries experienced good economic growth in the last decade up to now except for the year 2009 which followed the economic shocks experienced in 2008 due to the financial crisis. Table 1 shows the high economic growth in all the GCC countries. One major factor influencing the high rate of economic growth relates to demand. The government sector played an important role in increasing aggregate demand by using oil revenues to finance infrastructure projects. High government spending on infrastructure projects enhances the productivity of the private sector and consequently leads to economic growth (Voss, 2002; Ghassan and Alhajhoj, 2009). Table 6 shows that, on average, almost 30% of the GDP in the GCC countries from 2000-2011 was represented by government expenditure except the UAE. This indicates the importance of the government sector in the GCC countries, since all oil companies in these countries are government owned and given the fact that oil and gas revenues are used to finance the government sectors. However, the UAE depends on the private sector more than the government sector to enhance economic productivity especially in the services sector. Sturm et al. (2008) stated that:

The economic indicator of current account shows that the current account surpluses in the last decade in the GCC countries was due to high oil prices and oil demand which increased the oil revenues of the GCC countries. Table 7 illustrates that from 2000-2011, the average current account surpluses in the GCC countries ranged from 6.69% of the GDP in Bahrain to 31.27% in Kuwait.

However, the overall average of the current accounts in the GCC countries during this period was 14.14%. The GCC countries have tended to invest current account surpluses in international investments such as sovereign wealth funds. Friedman and Meakin (2009) considered the GCC countries to be home to some of the largest and oldest sovereign wealth funds. They estimated that the assets of the GCC countries ranged almost between 600 billion and 1 trillion US dollars at the end of 2008.

In addition, the increase in oil revenues caused liquidity (money supply), as represented by broad money (M3), to increase in the GCC countries. An increase in broad money plays a role in determining the RER through inflationary pressures. Table 8 indicates that the average money supply in the GCC countries ranged from 30.01% of the GDP in Oman to 67.44% in Bahrain from 2000-2010. Moreover, the ratio of money supply to GDP followed almost the same trend in all the GCC countries. Therefore, liquidity is a major factor in determining the RER in the GCC countries through the effect of the inflation rate.

One of the main objectives in establishing the council of GCC countries was to establish a sense of integration and inter-connection between member states in all economic fields such as finance, trade, tourism and customs. Therefore, the council established a free trade zone between member states in 1983, a customs union in 2003 and a common market in 2008. The council believed that these bodies will enhance more trade among the GCC countries (intra-trade) and ease the movement of labor and capital. Table 9 and 10 show that GCC intra-trade increased with time in terms of either exports or imports except in 2009 when the worldwide economic recession occurred. The value of exports and re-exports in the free trade zone among the GCC countries increased by 56.48% from 2006-2008 while the value of imports increased by 61.14% in the same period. Achieving the process of establishing a monetary union and a single GCC currency could assist in increasing intra-trade and enhancing the economic growth of the GCC countries. Ultimately, it will support the position of the GCC in terms of its regional and international economy.

In the 1980s, the GCC countries started to link their currencies to the US dollar. By 2003, all the GCC countries had pegged their currencies to the US dollar. However, in 2007, Kuwait decided to break this linkage and they re-pegged to a basket of currencies. There is considerable debate surrounding the strong linkage among most GCC currencies to the US dollar. Some economic analysts believe that the GCC countries should continue to peg their currencies to the dollar due to the size of the US economy and to the GCC countries’ investment in US markets.

On the other hand, some analysts believe that the GCC countries could benefit from free-floating currencies, especially in view of the weakness of the US dollar which has led to a reduction in the trade account of the GCC countries. Looking at the map of the trade direction of the GCC countries, it can be seen that the US accounted for only 8.5% of the trade values in the GCC countries in 2009 (Fig. 5). Figure 5 also illustrates that the EU accounted for 21% of the total trade values of the GCC. The rest of the world, the Islamic countries, the Arab countries and Japan accounted for 37, 8.4, 6.4 and 5.9% of the total trade values, respectively. The figure also shows that the trade values of intra-trade among the GCC countries was only around 13% which is considered to be relatively low and could be attributed to the similarity between the economic characteristics of the GCC economies.

In 1945, more than sixty years ago, the Arab countries tried to launch a united currency called “the Arab Dinar,” but this endeavor was never realized. Recently, six GCC Arab countries namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE became very close to succeed in their efforts. The research problem indicates that it is imperative to identify the behavior of determinants of RER for each GCC country. This identification will, then, allow for the determination and in-depth study of the similarities and differences in relation to the impact of each factor involved in RER patterns.

The purpose of this study was to investigate the determinants of the RER as inspired by the previous study. As a first step, each relevant variable will be tested according to the standard Augmented Dickey-Fuller (ADF) unit root test in order to be able to apply. While in the second step, the Engle and Granger (1987) stated that two-step co-integration method analysis will determine the appropriateness of using the Vector Error Correction (VEC) or Vector Auto-Regression (VAR) model for each GCC country. The equations were also tested for autocorrelation, heteroscedasticity and structural breaks.

MATERIALS AND METHODS

Data was collected from International Finance Statistics (IMF, 2012c), Penn World Table (IMF, 2012b) and World Development Indicators (World Bank, 2012) and Energy Information Administration (EIA), USA sources. Also, IMF (2012c) and SAMA (2011) sources were used to obtain financial statistics from international monetary fund, USA.

There are many econometric methods available to estimate the RER for each country. The most straightforward method is to use a two-step least squares procedure (Engle and Granger, 1987). First, the study used the method of least squares to estimate the co-integration relationship and to generate the lagged residuals. Secondly, the method of least squares was used to estimate the VEC and VAR models taking into consideration the facts that the variables in our system are co-integrated and the residuals must be stationary. In addition, it was kept in mind whether the variables under consideration are co-integrated and there is any long-term relationship between the trends in these variables. In this study, the techniques implemented by Engle and Granger (1987) and Johansen (1995) were followed. These econometric techniques allowed us to conduct an investigation of the determinants of RER on long and short term basis.

Econometric model: The econometric model used in the study is defined as follows:

Where:

The regression in this study was estimated twice for each GCC country i.e., once for the long term and once for the short term using VEC and VAR models.

To gain an understanding of whether the variables under consideration are stationary or not, the researcher in this study plotted each series to find out whether each series represented non-stationary data.

The Dickey-Fuller (ADF) unit root test was based on the following three regression forms:

Without constant and without trend:

With constant, but no trend:

With constant and with trend:

The hypotheses tested were:

H_o: δ = 0 (unit root), H₁: δ < > 0

Based on the econometrics information, it was decided that, as a rule, non-stationary variables should not be used in regression models to avoid the problem of spurious regression. However, there is an exception to this rule when the residuals of the regression are stationary. In this case, the variables are said to be co-integrated (sharing similar stochastic trends and never diverging too far from each other).

Based on the co-integration test, the researchers in this study used the VEC and VAR models (Johansen, 1995). The data was collected from 1982-2012 for the six GCC countries namely Saudi Arabia, United Arab Emirates, Kuwait, Qatar, Oman and Bahrain on the basis of nine variables are defined as follows:

RESULTS

Data in Table 11 indicates that all the economic variables were non-stationary series thereby concluding that it is not possible to reject the null hypothesis of the unit roots problem in variables except for the economic variables of LOGOPEN (Kuwait), LOGNKF (UAE) and LOGCAGDP in all of the GCC countries at 1% level of significance. That means that these variables are stationary series. These results seemed to reliable because the Durbin-Watson statistical tests were close to 2 which means that the variation in the series does not have an autocorrelation problem.

As a result, the researchers found that how to combine the stationary and non-stationary variables later on in a regression model. Co-integration is about the relationship between I(1) variables. The co-integrating equation does not contain I(0) variables. In other words, the stationary and non-stationary variables should not be mixed in a regression equation.

An I(0)-dependent variable on the left-hand side of the regression equation should be explained by other I(0) variables on the right-hand side and an I(1)-dependent variable on the left-hand side of the regression equation should be explained by other I(1) variables on the right-hand side.

Based on the available econometrics information, it was concluded that as a general rule, the non-stationary variables should not be used in regression models in order to avoid the problem of spurious regression. However, there is an exception to this rule when the residuals of the regression are stationary. In this case, variables are said to be co-integrated (sharing similar stochastic trends and never diverting too far from each other). To check for co-integration, the fitted regression equations for all GCC countries were obtained where the dependent variables were LOGRER. The non-stationary variables were excluded from the regression equations. The results of the fitted regression equations are presented in Table 12. Based on the results in Table 12, a test was performed for stationarity among the residuals. The results of the estimated unit root test equations for the residuals are presented in Table 13. As a result, the potential co-integration relationship contains an intercept term to capture the component of the RER which is independent of the independent variables included in the regression equation. Thus, at a 5% critical value for the test for stationarity, the null hypothesis of no co-integration was rejected and concluded that the variables in the system for the GCC countries are co-integrated. The results in Table 12 also imply that:

However, the growth in the RER in the GCC countries may not respond fully within the year. To ascertain how much it will respond within a year, the error correction model (VEC) was estimated using the method of least squares. The estimated VEC model is shown in Table 13 and the followings were observed.

The positive error correction coefficient in the equation indicates that ΔLOGRERB in Bahrain increased when there was a positive co-integration error. This negative change in the growth of the RER in Bahrain “corrects” the co-integration error. It is well known that if the variables are not stationary but are co-integrated, then the VEC model should be used. However, the error correction coefficient for Bahrain (R = 0.018831) is not significant at the 5% level suggesting that the dependent variable, ΔLOGRER, in Bahrain does not react to the co-integration error. In conclusion, the growth in the RER in Bahrain is significantly linked to the growth in the net capital flow, the growth of government consumption and the total reserves (including gold)/GDP:

DISCUSSION

The study results indicated that all the economic variables were non-stationary which did not allow to reject the null hypothesis of the unit roots problem in variables except for the economic variables of LOGOPEN (Kuwait), LOGNKF (UAE) and LOGCAGDP in all of the GCC countries at 1% level of significance. That means that these variables are stationary series. These results seemed to be reliable as the Durbin-Watson statistical tests were close to 2 which suggested that the variation in the series does not have an autocorrelation problem. Also, a change in RER is strongly linked to the growth of LOGGCON in Bahrain and Qatar; LOGLIQ in Kuwait, Qatar and Saudi Arabia; LOGOIL in Qatar and the UAE; LOGOPEN in Saudi Arabia alone; LOGNKF in Bahrain, Kuwait and Saudi Arabia; LOGRES in Bahrain, Saudi Arabia and the UAE and LOGRESN in Kuwait, Oman and Saudi Arabia. Similar findings were reported by many researchers who concluded that a change in RER is linked to various factors such as relationship between RER and NFA’s (Benassy-Quere et al., 2004) within a group of twenty from 1980-2002 using the panel co-integration method. They found that RER is likely to appreciate with decrease in the NFAs. Also, the financial development factor was introduced in the RER model in the Middle East and North Africa (MENA) region by Elbadawi and Kamar (2005). They observed a long-term relationship between RER and financial development. While, many researchers investigated the determinants of RER using different economic and financial factors such as the Gross Domestic Product (GDP), the degree of openness of the economy, oil prices, money supply, NFAs, reserves, public expenditures, real interest rates and the nominal exchange rates (Edwards, 1988, 1989; Froot and Rogoff, 1991; Faruqee, 1995; Agenor et al., 1997; Parikh, 1997; Feyzioglu, 1997; Elbadawi and Soto, 1997; Sekkat and Varoudakis, 1998; Ogun, 1998; Chen and Chen, 2007; Frankel, 2007; Habib and Kalamova, 2007; Mongardini and Rayner, 2009). Overall, the results of these studies varied based on the econometric techniques applied to investigate the determinants of RER in a changing economy of a country. The study findings coincided with those of Clark and MacDonald (1998) who built a model based on a reduced form of the equilibrium exchange rate equation and investigated the determinants of the equilibrium exchange rate using current account flow factors. Furthermore, Alberola (2003) illustrated that the RER in the European Union (EU) is affected by the current account and by NFAs. Egert et al. (2004) appreciated the RER due to higher capital inflows and higher NFAs.

CONCLUSION

The study indicated that all of the variables are non-stationary except for the economic variables of LOGOPEN (Kuwait), LOGNKF (UAE) and LOGCAGDP in all of the GCC countries at 1% level of significance. Therefore, these variables were excluded from the system when applying the econometric techniques, as these variable have zero order of integration I(0). The results indicated that all the economic variables that have one order of integration I(1) are co-integrated in the long run thus showing that a change in the RER is significantly linked to:

From these results, it can be concluded that there are different economic variables that determine the RER in GCC countries, even though there are some common economic variables that are used to determine the RER in some GCC countries.

Another significant finding of the study was the indication of the negative and positive error correction coefficients. Negative error correction coefficients indicate that the dependent variable (RER) should adjust upward, since the RER falls below its long-term value. While the positive error correction coefficient indicates that the dependent variable (RER) should adjust downward since the RER falls above its long-term value. Therefore, the results indicated that all the error correction coefficients are negative in all the GCC countries except Bahrain and Saudi Arabia having positive error correction coefficients. Finally, the results of the study indicated that the error correction coefficients of the RER among the GCC countries are not significant at the 5% level except the State of Qatar. This suggests that the dependent variable, ΔLOGRER, does not react to the co-integration error. However, in the case of Qatar, the error correction coefficient is significant and this implies that the adjustment for the growth in the RER in Qatar will deviate by -0.240808 in the short term. Namely, the RER in Qatar is going to reach long-term equilibrium within almost 4 years, according the values of the error correction coefficient of the ΔLOGRER variable in Qatar.

ACKNOWLEDGMENT

The authors would like to thank Deanship of Scientific Research , King Faisal University, Saudi Arabia for financial support of this research through Research Project Number 130047.

REFERENCES