The Role of Money in the Economy of Saudi Arabia Vector Autoregressive Approach

Abstract

This study aims to examine the role of money in the economic activities in the Kingdom of Saudi Arabia through its impact on non-oil GDP and price level using annual data from 1968 to 2009. To achieve this objective, the approach of vector-Autoregressive is used to examine the Variance Decomposition and Impulse Response Functions in the short and long terms. The study finds that money supply as a monetary instrument has a major role in explaining the variation in the non-oil GDP and price level in both medium and long terms compared to the short term. Also, the results of the Impulse Response Functions reveal the ability of money supply shocks to influence the non-oil GDP and price level in the short and long terms. Although the influence of money on non-oil GDP does not seem to be consistent with the monetary theory which claims the neutrality of money in the long run, this puzzling result can be attributed to the so-called "Wealth Effect" of the private sector in Saudi Arabia.