Inflation in the United Arab Emirates

The United Arab Emirates (UAE), as a small economy with an open capital account and pegged foreign exchange rate regime, has limited scope for exerting an independent monetary policy. More specifically, given that its key policy objective is to maintain a stable peg with US dollar, domestic short-term interest rates generally follow US interest rates and therefore, the Central Bank of the UAE (CBUAE) does not anchor the inflation target. Moreover, inflation in the UAE moves for the most part in response to other forces that are not under the direct control of the central bank. Specifically, non-tradables account for 63% of the CPI basket, of which housing accounts for 39% of the total. Further, inflation of tradables (37% of the CPI basket) moves with developments in the nominal effective exchange rate (NEER), largely attributed to bilateral movements in the US dollar with respect to major trading partners. While there is no explicit inflation target in the UAE, inflation is an important economic indicator which the CBUAE closely monitors. The following discusses the various inflation measurements and assesses the challenges involved in capturing underlying inflation. Full Publication: 'http://ssrn.com/abstract=2870167' Inflation Mechanisms, Expectations and Monetary Policy