Policy Briefs
Toward Frontier Macroeconomic Institutions in Support of Green-Energy Transition in GCC Countries
No.
PB 128
Publisher
ERF
Date
March, 2024
In a nutshell
- The current macroeconomic framework of GCC countries has served them rather well until now. However, their future energy and industrial transition toward a greener, sustainable economy will imply a more diversified production structure, which will require a very profound upgrade of institutions that govern their macroeconomic management.
- International experience shows that increasing numbers of industrial and emerging-market economies adopt a mix of floating exchange-rate regimes, independent central banks, and inflation-targeting regimes. In addition, many countries have put in place a fiscal framework comprised by ten institutional components, among which an independent fiscal council and a fiscal rule are key.
- Systematic empirical evidence shows that all the latter macroeconomic institutions have contributed significantly to higher economic growth and more macroeconomic stability. The world evidence also shows that countries which have not modernized and upgraded their macroeconomic institutions have sacrificed growth and have been subject more frequently to economic and financial crises.
- In their transition toward a greener and diversified economy, GCC countries will face much more difficult policy challenges and more frequent, diverse, intensive, and prolonged shocks than those they have faced until now.
- The international evidence suggests that GCC countries, in order to manage successfully their green transition, will require more real-exchange flexibility and a more advanced framework of monetary and fiscal institutions and rules, in order to ensure macroeconomic stability and to deal more effectively with foreign and domestic shocks.
- GCC countries should evaluate and then adopt a floating exchange-rate regime, combined with a monetary policy based on inflation targeting and conducted by an independent central bank.
- Regarding their fiscal policy framework, all GCC countries would do well in considering and implementing different institutional components of a frontier fiscal framework. In particular, adoption of an independent fiscal council and a fiscal rule would contribute to their fiscal stability, transparency, and credibility.
Authors
Klaus Schmidt-Hebbel
Professor of Economics at Universidad del Desarrollo