Oil prices dynamic effect on the economy

Abstract

Oil is one of the most important factors that affects the economy of Saudi Arabia heavily, as oil forms a major share towards economic growth. Past studies showed that oil prices can affect the economic growth especially in oil exporting countries like Saudi Arabia. This study aims to investigate the dynamic effect of oil price variations on Saudi Stock Market Index, Economic Growth, Real Exchange Rate, and Inflation. The study uses monthly data starting from January 1994 to September 2014 to see the impact of oil price on relevant variables. The Granger Causality test, Variance Decompositions analysis, and Impulse Response Functions are used for the analysis. Our findings show that the causality moves from oil prices to the variables of interest. Furthermore, Oil price fluctuations have a positive impact on the variables of interest. The variables had a positive response to oil price shock. This study improves the understanding of the interaction between oil prices and key variables of the Saudi Arabia economy. It extends the literature by involving an updated period and applying new model application. It provides more clarification to financial regulators and policy makers in formulating economic and financial policies.