The Impact of Macroeconomic Aggregates on Private Sector Dynamics in Saudi Arabia

Abstract

By applying a structural vector autoregressive (SVAR) approach, this paper investigates the sources of private sector fluctuations in the Saudi economy using annual data from 1973-2011. On the basis of variance decompositions and impulse response functions, the study finds that oil price shocks are the main source of private sector fluctuations. In addition, the results provide a strong support for one of the propositions of business-cycle theory in which supply shocks explain high fractions of private output. On the other hand, policy shocks, namely fiscal and monetary shocks seem to play a limited role in determining private sector dynamics. Last but not least, nominal shocks dominate real shocks in explaining the variability of inflation especially in the short term. In the long term, however, it is safe to conclude that oil prices are inflationary.

Keywords: SVAR, Private sector, Oil shocks, Saudi Arabia.