The Impact of Money Stock on the General Level of Prices In the economy of the Kingdom of Saudi Arabia for the period (1975-2014)

Abstract

This paper aims at investigating the impact of money stock on the general level of prices in the Saudi economy during the period 1975-2014. The Autocorrelation function, Augmented Dickey-Fuller Test and Phillips- Pernon Test, were used to identify the order of integration for each variable separately. Co-integration test was used for each of the method Angle- Granger and Johansen- Julius's to check the existence of a long run relationship between the two variables. In addition, The Error Correction Model have been applied to determine the direction of the causality between the two variables in the long run. The Granger causality was also used to explore the direction of the causality between the two variables in the short run. The statistical tests results showed that the variables were integrated of order one. The results of Co-integration tests showed that there is a long-run equilibrium relationship between the two variables. The estimation results of the error correction model indicate a causal relationship in the long run running from the independent variables to the general price level. The study also found that there is unidirectional causality over the short run, causality running from the money stock to the general price level, and not vice versa.