Bi-demographic and current account dynamics using SVAR model: evidence from Saudi Arabia

Abstract

The study explores the impacts of the bi-demographic structure on the current account and gross domestic product (GDP) growth. Using structural vector autoregressive modeling (SVAR), we track the dynamic impacts on these underlying variables. New insights about the dynamic interrelation between bi-population age dependency rate, current account, and GDP growth have been developed. In the short and medium terms, the reactions of GDP growth to both shocks of native and immigrant working-age populations move unsteadily in opposite directions. However, in the long run, both effects become moderately positive. Additionally, the positive long-run contribution of immigrant workers to the current account growth largely compensates for the negative contribution of the native population. We find a negative hump-shaped reaction of Saudi Age Dependency Rate to immigration policy shocks during a generation. When the shocks emanate from immigrants’ working age, there is a complex mechanism from the complementarity process to the substitutability process between immigrants and the Saudi workforce. In the short and medium term, the immigrant workers are more complement than substitutes for native workers.