Financial stability and monetary policy reaction: Evidence from the GCC countries

This paper investigates the interaction between monetary policy and financial stability in Gulf Cooperation Council (hereafter GCC) countries by introducing a new composite index to monitor vulnerabilities crisis periods. To this end, study estimated reaction functions for each GCC country (namely, Bahrain, Kuwait, Saudi Arabia, United Arab Emirates) using Nonlinear Autoregressive Distributed Lag Model (NARDL) over period from 2006-Q4 2020-Q2. Empirical findings indicate that authorities' response deviation of inflation their target level, output gap, or exchange rate movement differ magnitude, sign, significance across countries. The results further explain authorities react significantly negative positive shocks stability, but they differently short long term. Overall, an augmented Taylor rule including as additional is more appropriate