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Volume :21 Issue : 3 2014      Add To Cart                                                                    Download

Causality Relationship between Municipal Spending and Economic Growth in Saudi Arabia: An Econometric Approach

Auther : Abdulkarim K. Alhowaish

This study aims to determine the relationship between municipal spending (MS) and economic growth (GDP) in Saudi Arabia during the period of 1981-2012. Using Vector Auto-Regression (VAR) and Vector Error Correction Model (VECM), the study revealed that there is a long-run co-integration relationship between the two variables under investigation. This relationship is a bi-directional causality relationship, suggesting that a change in economic growth is positively causing change in municipal spending on the long-run, and vice versa. The results further indicated that a percentage growth in GDP induces approximately 0.12% growth in municipal spending and 1% growth in municipal spending induces approximately 0.04% growth in GDP, all things being equal. They also revealed that the municipal sector adjusted its spending (i.e. speed of convergence to equilibrium) by 22.7% of the past deviation from equilibrium, which means that municipal spending needs approximately 4.5 corrective-years periods in order to return to the long-run equilibrium after any impact or shock in the system as a result of the change in national economic growth.

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