The Effects of Asymmetric Oil Price Shocks on Saudi Arabian Macroeconomic Variables

Abstract

This paper focuses on analyzing the impact of oil price shocks (OILP) over some macroeconomic variables, non-oil GDP (NOIL), government expenditure (GOEX), and the capital formation (KFORM), in the Saudi economy covering the period of 1985-2015. Both symmetric and asymmetric oil price shocks are considered, using unrestricted VAR methodology. The empirical findings support long-run relationships among the macroeconomic variables. A linear oil price shocks indicate a positive influence on the macroeconomic variables. The effect ranged between 21-30 percent. On the other hand, non-linear positive oil price shock counted for about 3.8-6 percent, whereas a non-linear negative oil shocks affected the macro variables by 33-40 percent. Moreover, the symmetric oil price shocks are consistent with pairwise Granger causality test where the direction of causality is running from the oil price changes to non-oil GDP, government expenditure, and capital formation. Furthermore, asymmetric negative shocks have stronger and long lasting effects in comparison with asymmetric positive oil price shocks or with the symmetric oil price shocks. Saudi Arabia experienced years of surpluses, and now running deficits. The volatility of oil prices in the international market and thereby revenues compels the government to do more to stabilize revenues through diversification of production base.

Keywords: Oil Prices, Saudi Arabia, Co-integration Analysis, Economic Growth, Impulse Response.