WP/14/3 Economic Growth and Government Spending in Saudi...

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WP/ 14/3 Economic Growth and Government Spending in Saudi Arabia: an Empirical Investigation Saad A. Alshahrani, Ali J. Alsadiq
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© 201 4 International Monetary Fund WP/1 4 / 3 IMF Working Paper Fiscal Affairs Department Economic Growth and Government Spending in Saudi Arabia: An Empirical Investigation Prepared by Saad Alshahrani, Ali Alsadiq 1 Authorized for distribution by Victoria Perry January 201 4 Abstract This paper empirically examines the effects of different types of government expenditures, on economic growth in Saudi Arabia. We use different econometric techniques to estimate the short- and long-run effects of these expenditures on growth and employ annual data over the period 1969-2010. Our findings indicate that while private domestic and public investments, as well as healthcare expenditure, stimulate growth in the long-run, openness to trade and spending in the housing sector can also boost short-run production. These findings draw some policy implications for Saudi policymakers on maximizing the returns of the government spending on economic growth. JEL Classification Numbers: E62, H50, O13, Q48 Keywords: Economic Growth, Government Spending, Oil Exporting Economy, Saudi Arabia Authors’ E-Mail Addresses: [email protected] ; [email protected] 1 International Monetary Fund (Alshahrani and Alsadiq). We thank Ms. Victoria Perry, Mr. Ruud De Mooij, Mr. Abdelhak Senhadji, Mr. Francesco Grigoli, and Mr. Timothy Callen for useful comments and discussion. The views expressed in this paper are those of the authors alone and do not necessarily represent those of the IMF. All remaining errors are ours. This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.
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3 Contents Page Abstract ...................................................................................................................................... 2 I. Introduction .................................................................................................................... 4 II. Background .................................................................................................................... 5 III. Literature Review ........................................................................................................... 7 IV. Methodology .................................................................................................................. 9 A. Theoretical Model ..................................................................................................... 9 B. Empirical Methodology ........................................................................................... 10 C. Data ......................................................................................................................... 11 V. Empirical Results ......................................................................................................... 11 A. Stationarity and Cointegration ................................................................................ 11 B. Benchmark Analysis ............................................................................................... 13 C. Short-term Stability ................................................................................................. 14 D. Long-term growth: VECM Results ......................................................................... 19 E. Expenditures and Oil Revenues ............................................................................... 23 VI. Conclusion and Policy Priorities .................................................................................. 23 Tables 1: Unit Roots Tests ................................................................................................................... 12 2: Cointegration Tests .............................................................................................................. 13 3: Short-run Effects of Government Expenditures .................................................................. 14 3: Vector Error Correction Results .......................................................................................... 20 4: Maximum Likelihood Estimates of Cointegrating Vectors with Non-Oil GDP ................. 21 5: Post Estimation Tests: .......................................................................................................... 22 Figures 1: Annual Government Expenditures (Current prices): 1969-2010 ........................................... 5 2: Government Expenditures (Actual) ....................................................................................... 6 3: Impulse-Responses for Models 1-4 ..................................................................................... 16 4: Cumulative Impulse-Responses for Models 1-4 .................................................................. 16 5: Impulse-Responses for Models 6-9 ..................................................................................... 17 6: Cumulative Impulse-Responses for Models 7-9 .................................................................. 17 7: Conditional Cumulative Impulse-Responses for Models 7-9 .............................................. 18 8: Response of Expenditures to Oil Revenue Shock ............................................................... 23 References ................................................................................................................................ 25
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4 I. I NTRODUCTION
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