The effect of the fluctuations in the components of aggregate demand on the non-oil GDP of the kingdom of Saudi Arabia: a vector auto-regression analysis

The effect of the fluctuations in the components of aggregate demand on the non-oil GDP of the kingdom of Saudi Arabia: a vector auto-regression analysis

Khalid Hamad A. Alquadair

 

Keywords:  Saudi Arabia, Non-oil GDP components, Vector Auto Regression, variance decomposition, Impulse Response Functions

 

Summary: This study investigates the effect of the fluctuations in the components of aggregate demand on the non-oil GDP (RNOGDP) in the Kingdom of Saudi Arabia (KSA) using Vector Auto Regression analysis (VAR). The cointegration test indicates the existence of a long-term relationship between RNOGDP and the components of aggregate demand. The variance decomposition (VD) suggests that fluctuations in real government expenditure (RGOV) and real net exports (RNEXP) play a major role in explaining the fluctuations of real non-oil GDP, while the Impulse Response Functions (IRFs) indicate that the fluctuations in RGOV and real private consumption (RCONS) have a positive and the greatest influence on fluctuations in RNOGDP in the short run, but that vanishes in the long-term. On the other hand, the IRFs indicate that fluctuations in real investment (RI) and RNEXP have a negative effect on the fluctuations in RNOGDP in the short run, though they decline in the long run.

 

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