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Volume :22 Issue : 87 1997      Add To Cart                                                                    Download

BAHRAINI BUSINESS CYCLES AND THE ROLE OF FISCAL STABILISATION POLICIES:TIME-SERIES APPROACH

Auther : By: Dr. Ahmed Hashim AlYousha

The study addressed several issues related to Bahrain business cycle.  These are:

(1)  acknowledge the difference between stabilization and structural policies, the tests to determine the integration properties and the level of persistence in the GDP, non-oil GDP series are carried out to decide the policy to pursue for each series;

(2)  establish the chronology of the Bahrain business cycles;

(3)  detect the sources of macroeconomic fluctuations using the VAR approach and

(4)  investigate the conduct of fiscal stabilistion policies particularly the role of expenditure rationalization on Bahrain non-oil business cycle.

The results reveal that the series of GDP and oil-GDP are integrated of order one and both series posses high level of persistence.  For such series, a shock to their level will have permanent effect, so the only policies pursued are structural.  In contrast, the non-oil GDP is stationary and has little persistence, in other words allowing the usage of stabilization policies.  These results are consistent with the characteristics of the Bahraini economy.  Additionally, the results show that the effects of non-oil shocks on GDP are confined to the short-run, while oil shock are the main source of macroeconomic fluctuations over the medium and long rung despite the continuous efforts at diversifying the Bahraini economy, i.e. the Bahraini economy is largely an oil based economy.

The section on the chronology of Bahrain Business Cycles shows that the cycle of GDP, oil GDP and non-oil GDP last for six years of the first two series and four years for the last series.  The duration of expansion and contraction last for 4.5 and 1.5 for GDP, 2.75 and 1.25 for non-oil GDP and 3.3 and 2.7 for oil GDP.  Each phase of the cycle grows by 12.3 for oil GDP.  With respect to the oil sector, the results of growth point to the large fluctuation that this sector is exposed to. Given that Fiscal Policy Variable is the only macro variable that Granger cause non-oil GDP, the stabilization policies pursued by Bahrain since the mid 1980’s shows that rationalization programme is an important determinate of the growth of the non-oil GDP.  Increasing the efficiency of government resource allocation enhances the growth of non-oil GDP.

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