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Volume :19 Issue : 1 2012      Add To Cart                                                                    Download

The Relationship between Fiscal and Monetary Policy in the Kingdom of Saudi Arabia

Auther : Bandar A. Aba Alkhail and Hesham F. AloGeel

This paper attempts to analyze the interaction between fiscal and monetary policy, in both the short and long terms within the Kingdom of Saudi Arabia, using annual data for government expenditure and money supply variables during the period from 1970 to 2009. To achieve its objective, the study uses the Johansen test for co-integration to detect the long-term relationship between the two variables. The study also adopts the error correction approach to identify the direction of causality in both the short and long terms. The results of the study indicate the presence of a long-term relationship between money supply and government expenditure. It also shows the existence of a bi-directional causality in the short term between money supply and government expenditure, while there is unidirectional causality in the long term from money supply to government expenditure. These results reflect the role of monetary policy in achieving a sustainable fiscal policy, and provision of liquidity to finance development projects. Meanwhile, the bi-directional short term causality reveals that fiscal and monetary authorities shall take into account the overlapping between the two policies to achieve economic objectives, in order to avoid the undesirable economic impact that may occur as a result of lack of coordination.

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Nov 19, 2019

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