Testing for Causality between Oil Prices and Money Supply in Saudi Arabia (Note 1)

Moayad Al Rasasi, Phd,John H Qualls, Phd,Sultan Almutairi

doi:10.22158/jepf.v6n4p58

Abstract

The impact of oil price shocks on a country’s economy has been well studied in the economic literature. However, until now, articles analyzing the impact of these shocks on the Saudi Arabian economy have been relatively sparse. This paper attempts to shed some light on this important topic by examining the causal relationship between oil prices and an important monetary variable, the M3 (broad-based) money supply. Monthly data going back to 1982 were used in this study, which employs unit root tests and Granger causality analysis to test whether there is a causal relationship or not. No discernable causality relationship was found; this lack of such link leads the authors to conclude that this may be due to the prudent and stable fiscal and monetary policy on the part of the Kingdom’s government and its central bank, the Saudi Arabian Monetary Authority (SAMA).

Highlights

IntroductionSince the pioneer work of Hamilton (1983), there has been a growing and concentrated literature probing the link between oil price shocks and various macroeconomic indicators such as economic growth (e.g., Hamilton, 1996, 2003, 2008, 2009, 2010; Mork, 1986; Hooker, 1986; Barsky & Kilian, 2004; Kilian, 2008a, 2009; Al Rasasi & Yilmaz, 2016), inflation (e.g., Bachmeier & Cha, 2011; Barsky & Kilian, 2001; Kilian, 2008b), monetary policy
Despite the large share of existing literature assessing the impacts of oil price shocks on various economies across the globe, there is still much less research focusing on the Saudi Arabian economy
The literature analyzing the consequences of oil price swings on the Saudi economy is very scarce, and it mainly evaluates the impact of oil price shocks on some of the key macroeconomic variables – e.g., economic growth, inflation, the exchange rate, and the stock market (Note 1)

Summary

Introduction

Since the pioneer work of Hamilton (1983), there has been a growing and concentrated literature probing the link between oil price shocks and various macroeconomic indicators such as economic growth (e.g., Hamilton, 1996, 2003, 2008, 2009, 2010; Mork, 1986; Hooker, 1986; Barsky & Kilian, 2004; Kilian, 2008a, 2009; Al Rasasi & Yilmaz, 2016), inflation (e.g., Bachmeier & Cha, 2011; Barsky & Kilian, 2001; Kilian, 2008b), monetary policy The literature analyzing the consequences of oil price swings on the Saudi economy is very scarce, and it mainly evaluates the impact of oil price shocks on some of the key macroeconomic variables – e.g., economic growth, inflation, the exchange rate, and the stock market (Note 1). If the central bank choses to “sterilize” the deposit for instance by moving it offshore (e.g., by the purchase of foreign securities or by deposit in a foreign bank), the liquidity of the Saudi financial system would be unaffected Against this background, this paper attempts to enrich the prevailing literature on the Saudi economy by assessing whether oil price volatility causes changes in the M3 money supply. Critical values for constant= -2.87 and Trend= -3.43

Granger Causality Analysis

Findings

Conclusion