This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.According to a dynamic panel estimated over 1995-2008 on around 80 banks in the GCC region, the NPL ratio worsens as economic growth becomes lower and interest rates and risk aversion increase. Our model implies that the cumulative effect of macroeconomic shocks over a three year horizon is indeed large. Firm-specific factors related to risk-taking and efficiency are also related to future NPLs. The paper finally investigates the feedback effect of increasing NPLs on growth using a VAR model. According to the panel VAR, there could be a strong, albeit short-lived feedback effect from losses in banks' balance sheets on economic activity, with a semi-elasticity of around 0.4.

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The growth-at-risk (GaR) framework links current macrofinancial conditions to the distribution of future growth. Its main strength is its ability to assess the entire distribution of future GDP growth (in contrast to point forecasts), quantify macrofinancial risks in terms of growth, and monitor the evolution of risks to economic activity over time. By using GaR analysis, policymakers can quantify the likelihood of risk scenarios, which would serve as a basis for preemptive action. This paper offers practical guidance on how to conduct GaR analysis and draws lessons from country case studies. It also discusses an Excel-based GaR tool developed to support the IMF's bilateral surveillance efforts.

It is widely perceived that competition in the Indian banking sector has increased since the inception of the financial sector reforms in 1992. Using annual data on scheduled commercial banks for the period 1996–2004, the article evaluates the validity of this proposition in the Indian context. The empirical evidence reveals that Indian banks earn revenues as if under monopolistic competition.

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Motivated by the global inflation episode of 2007-08 and concern that high levels of inflation could undermine growth, this paper uses a panel of 165 countries and data for 1960-2007 to revisit the nexus between inflation and growth. We use a smooth transition model to investigate the speed at which inflation beyond a threshold becomes harmful to growth, an important consideration in the policy response to rising inflation as the world economy recovers. We estimate that for all country groups (except for advanced countries) inflation above a threshold of about 10 percent quickly becomes harmful to growth, suggesting the need for a prompt policy response to inflation at or above the relevant threshold. For the advanced economies, the threshold is much lower. For oil exporting countries, the estimates are less robust, possibly reflecting heterogeneity among oil producers, but the effect of higher inflation for oil producers is found to be stronger.

The assessment provides evidence of market segmentation across Islamic and conventional banks in the Gulf Cooperation Council (GCC), leading to excess liquidity, and an uneven playing field for Islamic banks that might affect their growth. Liquidity management has been a long-standing concern in the global Islamic finance industry as there is a general lack of Shari’ah compliant instruments that can serve as high-quality short-term liquid assets. The degree of segmentation and bank behavior varies across countries depending on Shari’ah permissibility and the availability of Shari’ah-compliant instruments. A partial response would be to support efforts to build Islamic liquid interbank and money markets, which are crucial for monetary policy transmission through the Islamic financial system. This can be achieved, to a large extent, by deepening Islamic government securities and developing Shari’ah-compliant money market instruments.

Foreword monetary policies on economic activity. It is questions such as these that this book attempts to answer. A fuller understanding of the interplay of these policy choices is vital to the work of the region's policymakers who are shaping the economic futures of these countries' citizens for years to come. The global crisis revealed the region's strengths and weaknesses, making this a particularly appropriate time to analyze the GCC region's macroeconomic situation. Such analysis relies on the expertise of this book's authors but also on the spirit of trust and cooperation that has been cultivated between the International Monetary Fund and its member countries' authorities. To date, this is the only book available on the macroeconomics of the GCC countries, providing original insights into the functioning of the GCC markets and the policy challenges ahead. This book, like other IMF work in the region, is part of an ongoing research agenda that recognizes the area's important contributions to global economic and fi nancial stability. Maintaining and building on that stability are important steps toward broadening equality and fostering prosperity.