A study of Kuwait's monetary sector
This study is concerned with the structure, development and working of the monetary sector in the State of Kuwait. Initially, the characteristics of the Kuwaiti economy are examined in order to put the monetary sector into perspective. It is shown that the Kuwaiti economy possesses the general characteristics of less developed economies together with some distinguishing properties. It is argued that since there exists no one-to-one relationship between government revenue and expenditure, the money supply, in the short run, tends to be insulated from the effect of the external balance. - The working of Kuwait's monetary sector is studied through the balance sheets of the Central Bank and commercial banks, and that leads on to an analysis of the money supply process. The definition of money is discussed, and it is argued on the basis of empirical evidence that the broad money supply is the most appropriate for the purpose of monetary control. Causality testing reveals a unidirectional effect from money to income, and the estimation of velocity equations indicates that financing economic development by monetary injections is inflationary in the short run. A multiplier reduced-form model reveals the viability of short-run monetary control in Kuwait, but it is argued that monetary policy has been ineffective in this respect. It is also postulated that the combination of interest and exchange rate policies gives rise to the recurring problem of capital outflows. A structural econometric model of the monetary sector shows that the equilibrium stock of money is determined by supply and demand factors, and that the control of banks' reserves can (in part) accomplish the objective of monetary control. The model also reveals that both monetary and fiscal actions affect real output and prices, but the former tend to be more powerful. It is recommended on the basis of this study that the Central Bank should be given greater autonomy in formulating and executing monetary policy, and that its research capabilities need to be improved. Urgent attention must be paid to developing financial markets and upgrading tools of monetary policy. Finally, It Is argued that the Ministry of Finance should take part in the control of money and credit by manipulating its deposits and, perhaps, adopting a simple constant change rule in government expenditure.