The Effects of the Fiscal Policy on Economic Activity in Saudi Arabia: An Empirical Analysis

Abstract

The fiscal policy has been studied extensively, but only as a one shot deal and with emphasis on developed economies. The study of fiscal policy as a trajectory and of its consequences, also, as trajectory has been pioneered by Blanchard and Perotti (2002). This study applies the Blanchard-Perotti concept to Saudi Arabian economy. We used structural vector autoregression (SVAR) technique. The results show that government spending shocks have positive effects on GDP and private consumption, but they have negative effects on private investment (i.e., crowding out), exports and imports, while net tax revenue has a negative effect on GDP. When we extended the model by including inflation and interest rates, we obtained similar results. The government spending shocks are found to have positive effects on inflation and interest rates. As a check on our methodology, similar analyses are performed on Indonesia, Malaysia, and Norway and we found that they validate our findings.