Restructuring Middle Easts Monetary and Fiscal Policy to Remedy the Surge in Inflation and Home Prices - Research Proposal Example

Research Questions

The proposed research topic is “restructuring middle east’s monetary and fiscal policy to remedy the surge in inflation and home prices: a focus on the effects of currency pegging”. The commercial commodity traded to the international markets within the Middle East is oil. From oil, Middle East nations acquire government funding through the sale of oil to oil consuming markets among them the developed economies. However, due to problems associated with foreign exchange costs, fixed exchange rates, a strategy referred as currency pegging is observed to play a primary role of facilitating trade between Middle Eastern nations and economies such as the U.S (Amiti, Itskhoki, and Konings, 2014). However, with most Middle East currencies pegged to the US Dollar, lack of monetary independence and increase in currency speculation are among policy challenges facing the fixed exchange strategy currently relied on. Following the uncertainty that currency pegging benefits of lowering exchange rate costs are dependable on the short run, this study aims at proposing a remedy to the long term issues associated with currency pegging in an attempt to open international trade opportunities between the Middle East and other economies such as UK, EU, and others (Crowder, 2014). The imposition of discipline on government policies and reduction of exchange-rate volatility are among the outstanding benefits of currency pegging. However, this study aims at proposing a framework which eliminates the disadvantages of currency pegging under the constraint of pegging one nation’s currency with reference to the dominating debt currencies. In particular, the problems of speculation and the complexity of currency pegging in situations where national debt is denominated by a variety of other currencies are among the focus areas of the research.

The research questions for the study include;

• In what ways does the Middle East defend its currency pegging to the US Dollar?
• How can the Middle East benefit from gaining monetary independence through a flexible monetary policy framework?
• How can a new exchange rate framework reduce the effects of currency speculation such as bubbles?
• In what ways can exchange rates’ volatility be addressed without creating economic bubbles?

Research Background

The Middle East is house to some of the oil rich nations in the world. Due to the abundance of oil as a commercial commodity for most of the nations, currencies are pegged to the US-Dollar. Pegging currencies to the dollar or any other currency indicates that the central bank of a particular nation decides whether their currency is suitable for pegging with any other. Among the benefits of pegging currencies include the reduction of exchange rate costs (Chen, 2016). Nonetheless, literature shows that currency pegging has far more reaching problems than most literature defines. Since currency is applied as a strategic approach to international trade, most research has embarked on justifying the use of currency pegging and the associated benefits (Choi, and Jin, 2014). In this study, long term negative effects of currency pegging are discussed to fill the gap in knowledge on how to minimize the effects of currency pegging. In order for a reliable monetary and fiscal policy to be implemented within the Middle East, historical trade related issues caused by currency pegging are on record as having an impact on international trade as well as increasing inflation and home prices.

For about 30 years, the Saudi Arabia Kingdom has been an example of nations which use fixed exchange rate. The result of implementing the fixed currency rate framework, government finances stabilized. However, more than 90% of Saudi’s government revenues are generated from oil sales (Rogmans, and Ebbers, 2013). Like Saudi Arabia, other nations around the Middle East also thrive on oil which is priced in US Dollars. With reference to investments and oil trade, Middle Eastern nations reported that fewer dollars were coming into their economies. From a long term perspective, if the dollar is stretched further, the local currencies of Middle East nations would weaken assuming that the peg to the dollar was removed (Coudert, Couharde, and Mignon, 2013).

While ignoring the positive application of currency pegging, a minority view that Middle Eastern nations should abandon currency pegging is gaining popularity. Building from the idea of abandoning the peg. With reference to major oil producing nations in the Middle East and the Gulf, low oil prices have plunged and an adjustment is necessary since the effect of highly trading dollar translates to inflation since local currencies exchange as a lower rate. Focusing on members of the OPEC, Middle Eastern representatives have experienced the effect of low oil prices since 2014. Among the recorded effects include budget deficits for a majority of the nations. In order to remedy some of the problems directly linked to fallen oil prices, these nations have embarked on buying their currencies back with dollar reserves they have accumulated from oil sales during years of better prices. However, it is observed that these dollar reserves are on the decline and indicate that poor future sustainability of these economies may lead these economies into financial crises (Alkhater, and Basher, 2016).

In perspective, the more Middle East nations continue to spend their dollar reserves in fear of devaluation of their currencies, the deeper the nations go into financial problems. Nations avoid devaluation due to long terms effects since business and households with debts in foreign nations would have to deal with high payment costs. On the other hand, consumers on the other hand will have to face higher inflation rates. However, the currency pegging strategy requires a rather carefully planned monetary policy since negative results have been recorded with Azerbaijan and Kazakhstan whose currencies fell to more than half their values upon the scrapping of the peg. With emphasis on slowing economic growth within the Middle East, it is observed that changes in economic fundamentals lead to breaking of pegs (Gokay, 2015). The breaking of pegs requires the restructuring of monetary and fiscal policies to ensure that the highlighted associate problems are in check.

Literature Review

Among the issues related with currency pegging and the lack of a more robust monetary and fiscal policies include the effects of fluctuating interest rates of the pegged currency. For instance, pegging currencies to the US-Dollar in 2007 and 2008 led to national currency pegged to the dollar benefiting from the zero-interest rate charged at that time (Gokay, 2015). However, since the only beneficiaries of the interest rate change were the emerging markets which embarked on cheap financing options to boost economic growth, an increase on the interest rates on other hand, shows that investors would hold on to the dollar leading to an economic stalemate.

The perspective that an increase in the dollar interest rates has a negative impact on economic development, is supported by the argument that emerging markets have the problem of facing capital flight from investors. In addition, the instability associated with currency pegging on interest rates also has the potential of leading to a depreciation of emerging economy currencies while at the same time triggering unfavorable economic shifts (Alkhater, and Basher, 2016). In addition, companies within the emerging economies will fall into major problems when servicing dollar-dominated debts. However, literature shows that problems associated with changing dollar interest rates may not apply to all Middle Eastern issues, nations such as those registered in the GCC enjoy vast financial wealth and trade surpluses enabling them to minimize external financing options if US’s monetary policy is tightened. Consequently, the nations within the financial stabilities also face the problems of large interest gaps with the US dollar would lead to vulnerability that destabilizes the capital flows.

Since it is recommended that currency pegging should observe the trends of the currency they are pegged to, the effect is to ensure that interest gaps are on check. As a result, the recommended approach to resolving currency pegging issues is to raise interest rates with the dollar for all dollar pegs. Nonetheless, the potential decoupling of monetary policies for pegged currencies lead to further inability to peg the currencies. As some nations would argue that keeping their currency pegs is the best option, it is observed that in the short term, currency pegs would work assuming the currency they are pegged to change gradually. However, in the medium and long terms, the Middle East nations are in dare need to take advantage of flexible rates of exchange (Gokay, 2015).

Theoretical View

Inconsistency Theory

Borrowing from the economic theory of inflation, time inconsistency theories indicate that high levels of inflation should not be anticipated if low inflation can be achieved with means of suitable fiscal policy. With reference to interpretation of the economic theory, it is observed that a government can achieve best results at the natural rate of unemployment of inflation and unemployment were considered together (Jin, Choi, and Choi, 2016). From this, the rate of inflation, if maintained at a lower level, will lead to an equilibrium even if unemployment rate stayed the same. However, a higher inflation rate unsupported by economic incentives will fall short of attaining equilibrium. Thus, one of the merits of establishing a new monetary policy for the Middle East is to ensure that effects of fiscal policy changes in other economies do not lead to high inflation leading to flight of investment and plunging of the economy (Jin, Choi, and Choi, 2016).

Fear of Floating Theory

The fear of floating theory is involved with the assumption that governments will fear the increase of inflation if the currencies of their trading partners fall. As a result, exchange rate stabilization is important as it prompts the desire to keep inflation low and results in the de facto exchange rate peg. This argument states that nations would peg their currencies to their primary trading partners’ currencies as motive to cut back on the effect of depreciating currencies on inflation rates. Since monetary policies would not guarantee the prevention of importing inflation, factors such as granting full independence to central banks are recommended as suitable options (Rogmans, and Ebbers, 2013). Since governments will take into account the merit of borrowing credibility, their establishment of a correct anchor currency is incorrectly predicted. As a result, those nations with the need to borrow external credibility in an effort to overcome time inconsistency problems, better choice than the highly inflated and potentially high volatile US-Dollar (Coudert, Couharde, and Mignon, 2013).

Methodology

The research will take into account a positivist approach taking interviews and questionnaires as the data collecting instruments. The target sample include financial and economic analysts from the Middle East. The sample size is estimated to be 200 analysts from a minimum of 50 financial and listed companies. Interviews will target executive financial personalities such as CFOs while questionnaires will target economic analysts whose role would be to provide information in terms of how currency pegging and associated challenges lead to economic problems of inflation and surging home prices. In addition, data from government databases will be analyzed in terms of industrial investment with reference to varying fiscal policies and exchange rates affecting Middle East. Among the study questions, focus will be on the effects of currency pegging in terms of increasing import costs, the increase in debt payment costs, and withholding of the dollar under capital flight. While the benefits of developing a flexible and dependable monetary and fiscal framework, this study aims at filling the information gap on remedies to fixed exchange rates.

Research Schedule

The research schedule is spread over a period of 3 years, the same timeframe allocated for the completion of the program. Based on SOAS’s Ph.D program recommendations, the three years of research will take into account preparation for the study, the collection of data, and writing of the thesis as outlined below.

First Year

During the first year, I will attend research training and seminars to familiarize myself with standard research procedures and emerging research innovations. As a result, I will also start on the literature review chapter of my thesis by acquiring a list of bibliographical material for previous study views on the topic of interest. The literature review will rely on secondary sources which comprise on peer-reviewed financial management and international business journals and books.

Second Year

With a sample target of 200, data collection will start with identifying economists and financial analysists within the Middle East. With more than 500 listed companies and financial institutions in the Middle Eastern nations, identifying and recruiting the correspondents will take into account registered economic analysists, financial analysts, and monetary policy oversight committees. This process will involve meeting face-to-face or making direct calls in the field taking major financial institutions and economy analysis agencies within the Middle East. With the anticipation of varying schedules with potential interviewees, phone call interviews will serve as the alternative remedy to the limitation since the target sample is expected to be mostly busy and occupied with corporate activities. Collected data is to be quantified as questions will be scaled using Likert-5 scale for questions taking the perspective of economic and financial analysis statements. The scale will consider 5 as strongly agreeing and 1 as strongly disagreeing with the question statements. Data analysis will take into account statistics software such as SPSS, Eviews, or Stata to empirically test the correlation of fiscal policy changes with economic and financial security of Middle East emerging economies.

Third Year

After securing reliable sources of information for the secondary information regarding previous research on the topic and having collected primary data, I will start the writing of my draft in my third year. The draft writing will involve the consultation with thesis supervisors and relevant academics to assess my progress since a doctoral thesis involves extensive literature review, empirical analysis, and theory-integration, hence requiring progressive supervision. The end of the third academic year, I should have finished with writing the first draft and submitted it for evaluation.

Time Evaluation

The allocated time for the completion of the Ph.D program is enough to complete the research on time. My assurance on this issue is because I come from Kuwait and I have sufficient sources of information to provide relevant and timely information on corporate administration since reaching the desired number of correspondents will be easy.

Research Funding

In order to complete my Ph.D program and successfully complete my research, I will be attending full-time for the corresponding timeframe allocated.. In addition, I will privately sponsor the full amount for the duration in which I will be enlisted as a Ph.D student in the SOAS University of London. In addition, the funding for the program is already secured.