Oil price fluctuations are a major source of disturbance for the economies of oil producing countries. In this study, a vector Autoregression Model, Vector Error Correction Model and Structure VAR Model were all estimated using seven key macroeconomic variables for state of Kuwait. A quarterly data were for the period 1984:1-1998:4 for those seven variables which were used to estimate the various models. All three estimated models indicate a high degree of interrelation between major macroeconomic variables. The results also highlighted the causality running from the oil prices and oil revenues, and government development and current expenditure, towards other variables. The most striking result is that government fiscal stimuli is the main determinant of domestic prices, while monetary stimuli have the least results. The policy implication of this is that fiscal policy can be used more effectively to stabilize the domestic economy after an oil shock.

SUMMARYIn this study, a vector autoregression model (VAR) and a vector error correction model (VECM) were estimated to examine the impact of oil price #uctuations on seven key macroeconomic variables for the Kuwaiti economy. Quarterly data for the period 1984}1998 were utilized. Theoretically and empirically speaking, VECM is superior to the VAR approach. Also, the results corresponding to the VECM model are closer to common sense.However, the estimated models indicate a high degree of interrelation between major macroeconomic variables. The empirical results highlight the causality running from the oil prices and oil revenues, to government development and current expenditure and then towards other variables. For the most part, the empirical evidence indicates that oil price shocks and hence oil revenues have a notable impact on government expenditure, both development and current. However, government development expenditure has been in#uenced relatively more.The results also point out the signi"cance of the CPI in explaining a notable part of the variations of both types of government expenditure. On the other hand, the variations in value of imports are mostly accounted for by oil revenue #uctuations and then by the #uctuation in government development expenditures. Also, the results from the VECM approach indicate that a signi"cant part of LM2 variance is explained by the variance in oil revenue. It reaches about 46 per cent in the 10th quarter, even more than its own variations.