No abstract

This research paper estimates the augmented money demand function for Saudi Arabia while incorporating stock prices as one of the key determinants and utilizing quarterly data spanning over the period of 2010-2018. The estimated money demand function coincides with theoretical expectation regarding income and interest rate over long run. In Particular, the demand for money is statistically significant and positively related with income while it’s negatively related with interest rate. On stock prices, the findings suggest that they are statistically significant and have positive impact on money demand over the long run. Moreover, the estimated error correction model indicates that it takes money demand about two quarters to adjust to its equilibrium condition.

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).

IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.