The Effects of the Fiscal Policy on Economic Activity in Saudi Arabia

166 Pages·2012·2.29 MB·English

The Effects of the Fiscal Policy on Economic
Activity in Saudi Arabia: An Empirical Analysis

By
Kablan Alkahtani

Submitted to the Department of Economics and the Graduate Faculty of the
University of Kansas in partial fulfillment of the requirements for the degree of Doctor of
Philosophy

________________________________
Mohamed El-Hodiri (Chair)
________________________________
Elizabeth Asiedu
________________________________
Gautam Bhattacharyya
________________________________
Jianbo Zhang
________________________________
Jacquelene Brinton

Date Defended: 6th December, 2013
The Dissertation Committee for Kablan Alkahtani
certifies that this is the approved version of the following dissertation:

THE EFFECTS OF THE FISCAL POLICY ON ECONOMIC ACTIVITY IN
SAUDI ARABIA
AN EMIRICAL ANALYSIS

________________________________
Chairperson: Mohamed El-Hodiri

Date approved: 6th December 2013

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Abstract
The fiscal policy has been studied extensively, but only as a one shot deal and with
emphasis on developed economies. The study of fiscal policy as a trajectory and of its
consequences, also, as trajectory has been pioneered by Blanchard and Perotti (2002). This
study applies the Blanchard-Perotti concept to Saudi Arabian economy. We used structural
vector autoregression (SVAR) technique. The results show that government spending shocks
have positive effects on GDP and private consumption, but they have negative effects on
private investment (i.e., crowding out), exports and imports, while net tax revenue has a
negative effect on GDP. When we extended the model by including inflation and interest
rates, we obtained similar results. The government spending shocks are found to have
positive effects on inflation and interest rates. As a check on our methodology, similar
analyses are performed on Indonesia, Malaysia, and Norway and we found that they validate
our findings.

Key words: Fiscal policy, fiscal multiplier, growth, Saudi Arabia

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Acknowledgements

I would like to express my sincere gratitude and appreciation to my advisor, Prof.
Mohamed El-Hodiri, for his endless support, encouragement, and guidance. I also would like
to thank my dissertation committee, Prof. Elizabeth Asiedu, Prof. Gautam Bhattacharyya,
Prof. Jianbo Zhang and Prof. Jacquelene Brinton, for their valuable comments and
suggestions.
I would like to extend my gratitude to all my friends, here in the City of Lawrence
for their support and help.
My special gratitude goes to my family members, specially my mom, for their help
and support through my whole academic experience. Special gratitude extended to my
brothers and sisters.
Finally, my deepest thanks and appreciation go to my wife for her endless support.
Without her help and support, this dissertation will not be possible. I would like to dedicate
this work for her and my son, Abdulaziz.

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Table of Contents
CHAPTER 1: INTRODUCTION ............................................................................... 1
1. 1 Overview ........................................................................................................ 1
1. 4 Significance of the Study ............................................................................... 3
1. 5 Data and Methodology ................................................................................... 3
1. 6 Organization of the study ............................................................................... 4
CHAPTER 2: LITRATURE REVIEW ..................................................................... 6
2. 1 Simulations based on large models ................................................................ 9
2. 2 Simulations based on computational general equilibrium models .............. 12
2. 3 Econometric methods based on survey data ................................................ 13
2. 4 Econometric methods based on time series data .......................................... 14
CHAPTER 3: SPECIFICATIONS AND METHODOLOGY ............................... 23
3. 1 Model (1): The Blanchard and Perotti approach.......................................... 25
3. 2 Model (2): Extended 4-VAR model ............................................................ 26
3. 3 Model (3): Extended 5-VAR model ............................................................ 27
3. 4 Stationary Test ............................................................................................. 28
3. 5 Lag Order Selection ..................................................................................... 29
3. 6 Model Misspecification ............................................................................... 29
CHAPTER 4: ECONOMY OF SAUDI ARABIA................................................... 31
Overview .................................................................................................................. 31
CHAPTER 5: EMPIRICAL ANALYSIS RESULTS ............................................. 37
Model (1): The Blanchard and Perotti approach...................................................... 39
Model (2): Extended 4-VAR model ........................................................................ 40
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Model (3): Extended 5-VAR model ........................................................................ 49
CHAPTER 6: VALIDATION ................................................................................... 54
Indonesia .................................................................................................................. 54
Malaysia ................................................................................................................... 69
Norway ..................................................................................................................... 79
CHAPTER 7: CONCLUSION.................................................................................. 93
REFERENCES ........................................................................................................... 94
APPENDICES .......................................................................................................... 100

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List of Tables
Table 1: The Augmented Dickey-Fuller Test of Saudi Arabia ................................................. 38
Table 2: The Augmented Dickey-Fuller Test, Indonesia ......................................................... 55
Table 3: The Augmented Dickey-Fuller Test, Malaysia .......................................................... 70
Table 4: The Augmented Dickey-Fuller Test, Norway ............................................................. 82
Table 5: Lag order of LGDP,Saudi Arabia ........................................................................... 100
Table 6: Model Specification, Saudi Arabia .......................................................................... 100
Table 7: SVAR Results_Model (1), Saudi Arabia .................................................................. 102
Table 8: VD of GDP, Saudi Arabia ....................................................................................... 103
Table 9: VD of GDP_LCONSS, Saudi Arabia ....................................................................... 103
Table 10: VD of GDP_LINV, Saudi Arabia ........................................................................... 104
Table 11: VD of GDP_LEXPO, Saudi Arabia ....................................................................... 104
Table 12: VD of GDP_ Extended 5-VAR model, Saudi Arabia ............................................. 105
Table 13: The lag order of LGDP, Indonesia ........................................................................ 106
Table 14: Model Specification, Indonesia ............................................................................. 106
Table 15: SVAR Results_Model (1), Indonesia ...................................................................... 107
Table 16: VD of GDP, Indonesia ........................................................................................... 108
Table 17: VD of GDP_Lconss,Indonesia ............................................................................... 111
Table 18: The lag order_LEXPO, Indonesia ......................................................................... 111
Table 19: VD of GDP (lexpo), Indonesia............................................................................... 113
Table 20: The lag order_limp, Indonesia .............................................................................. 115
Table 21: VD of GDD_Limp, Indonesia ............................................................................... 116
Table 22: The lag order _Malaysia ....................................................................................... 121
Table 23: Model Specification, Malaysia .............................................................................. 123
Table 24: The lag order_lcons, Malaysia .............................................................................. 123
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Table 25: VD of LGDP_lcons, Malaysia ............................................................................... 126
Table 26: The lag order_linv, Malaysia ................................................................................ 126
Table 27 : VD of LGDP_linv, Malaysia................................................................................. 127
Table 28: VD of LGDP_lexpo, Malaysia ............................................................................... 127
Table 29:The lag order, limp, Malaysia ................................................................................ 128
Table 30: The lag order, GDP_Norway ................................................................................ 128
Table 31: SVAR Results_Model (1)........................................................................................ 130
Table 32: VD of GDP, Norway .............................................................................................. 131
Table 33: VD of GDP_LCONSS, Norway.............................................................................. 131
Table 34: VD of GDP_LINV, Norway ................................................................................... 132

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List of Figures
Figure 1: Real GDP, Saudi Arabia .......................................................................................... 34
Figure 2: GDP growth rate, Saudi Arabia ................................................................................ 35
Figure 3: Oil GDP, Non-Oil GDP, Real GDP ......................................................................... 35
Figure 4: Oil and Non-Oil GDP shares to GDP ....................................................................... 36
Figure 5: Oil Government Revenue (% of GDP)..................................................................... 36
Figure 6: Debt/GDP, Malaysia ................................................................................................ 70
Figure 7: GE/GDP ratio, Norway ............................................................................................ 80
Figure 8: GR/GDP ratio, Norway ............................................................................................ 81
Figure 9: The debt/GDP ratio, Norway .................................................................................... 81
Figure 10: Stability of the reduced-form VAR model,Saudi Arabia ..................................... 133
Figure 11: The IRF (GE before GR), Saudi Arabia ............................................................... 133
Figure 12: The IRF (GE before GR)-Private consumption, Saudi Arabia ............................ 134
Figure 13: The IRF (GE before GR)-Private investment, Saudi Arabia................................ 135
Figure 14: The IRF (GE before GR) - Exports, Saudi Arabia ............................................... 136
Figure 15: The IRF (GE before GR) - Imports, Saudi Arabia ............................................... 137
Figure 16: The IRF (Extended 5-VAR model), Saudi Arabia ............................................... 138
Figure 17: Stability of the reduced-form VAR model,Indonesia .......................................... 139
Figure 18: The IRF (GE before GR), Indonesia .................................................................... 139
Figure 19: The IRF (GE before GR), Private consumption, Indonesia ................................. 140
Figure 20: The IRF (GE before GR), Exports, Indonesia ...................................................... 141
Figure 21: The IRF (GE before GR), Imports, Indonesia ...................................................... 142
Figure 22: The IRF (Extended 5-VAR model), Indonesia .................................................... 143
Figure 23: Stability of the reduced-form VAR model, Malaysia .......................................... 144
Figure 24: The IRF (GE before GR), Malaysia ..................................................................... 144
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Figure 25: The IRF (GE before GR), Private consumption, Malaysia ................................. 145
Figure 26: The IRF (GE before GR), Private investment, Malaysia ..................................... 146
Figure 27: The IRF (GE before GR), Exports, Malaysia ....................................................... 147
Figure 28: The IRF (GE before GR), Imports, Malaysia ....................................................... 148
Figure 29: The IRF (Extended 5-VAR model), Malaysia ..................................................... 149
Figure 30: Stability of the reduced-form VAR model, Norway ............................................ 150
Figure 31: The IRF (GE before GR), Norway ....................................................................... 150
Figure 32: The IRF (GE before GR), Private consumption, Norway .................................... 151
Figure 33: The IRF (GE before GR), Private investment, Norway ....................................... 152
Figure 34: The IRF (GE before GR), Exports, Norway ........................................................ 153
Figure 37: The IRF (GE before GR), Imports, Norway ........................................................ 154
Figure 38: The IRF (Extended 5-VAR model), Norway ....................................................... 155

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