Abstract
Testing cyclicality of fiscal policy is pertinent in any country to observe its type of cyclicality with the business cycle. In the oil abundant economy, oil price and trade openness may also play a role in determining the fiscal policy cyclicality. This research probes the role of economic growth, trade openness, and oil price on government consumption growth to verify the type of cyclicality in Saudi Arabia from 1971 to 2018. The cointegration test of Pesaran (2001) is utilized to test the cyclicality hypothesis with augmented critical bound statistics developed by Kripfganz and Schneider (2019). We corroborate the long and short-run relationships in the fiscal model of Saudi Arabia. Further, procyclicality is proved in the long run and countercyclicality is corroborated in the short run with a one-year lag effect. Moreover, government revenue has a positive effect on expenditure. However, oil prices and trade openness could not affect government spending. Keywords: Fiscal Cyclicality, oil price, trade openness, government consumption, economic growthJEL Classifications: E62, Q41, P33, O43 DOI: https://doi.org/10.32479/ijeep.10700
Highlights
Saudi Arabia is the leading oil-producing and oil-exporting country in the world
The present study aims at applying the recent and efficient unit root and cointegration tests to ensure the reliability of estimates to explore the nature of the cyclicality of fiscal policy in Saudi Arabia
This research investigates the nature of fiscal cyclicality in an oil-exporting country Saudi Arabia from 1971 to 2018
Summary
Saudi Arabia is the leading oil-producing and oil-exporting country in the world. Its export revenue from oil consists of about 90% of total government revenue (Government of Saudi Arabia, 2020). It’s spending budget and fiscal policy majorly depending on growth in the oil sector. It is very important to investigate this issue in the case of Saudi Arabia because of heavy dependence on the oil sector to meet the fiscal spending requirement. The present study aims at applying the recent and efficient unit root and cointegration tests to ensure the reliability of estimates to explore the nature of the cyclicality of fiscal policy in Saudi Arabia. After investigating the cyclicality issue in the case of Saudi Arabia by using unit root and cointegration technique to verify this important issue of fiscal cyclicality, this study would discuss that fiscal policy is correcting the economic cycle or not and would recommend the most reasonable choice of policy to smooth the economic cycle
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