Inflation in Saudi Arabia: Long and Short Run Determinants
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Date
2015-04
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The British University in Dubai (BUiD)
Abstract
This paper investigates the possible long run and short run relationships of various economic factors on Consumer Price Inflation in the Kingdom of Saudi Arabia using Bounds Testing approach as presented by Pesaran et al (2001) and Johansen (1998) multivariate cointegration method. Two economic models are presented in the study. The first model investigates the relationship between domestic Consumer Price Index and World Food Price Index, domestic Broad Money Supply (M2), Trade Weighted Dollar Index and 3 month Eurodollar interest rate using Bounds Test approach presented by Pesaran et al (2001). The second model investigates the relationship between domestic Consumer Price Index and World Commodity Price Index, domestic Broad Money Supply (M2), domestic Nominal Effective Exchange Rate and 3 month US Treasury Bill Rate/
The results obtained exhibit existence of long run relationship (cointegration) between domestic price inflation, global food and commodity prices, domestic money supply, domestic effective exchange rate and the foreign interest rate (US).
The study concludes that in the long run both world commodity and food prices and money supply exert a positive pressure on domestic prices whereas appreciation in Saudi Riyals value and foreign (USA) interest rate exert a negative pressure on local price inflation. In the short-run while other factors have similar effect as that of long-run, money supply is found to have minimal role.
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DISSERTATION WITH DISTINCTION
Keywords
inflation, Saudi Arabia