AN IMPULSE RESPONSE FUNCTIONS ANALYSIS OF OIL PRICE EFFECT ON KEY ELEMENTS OF THE SAUDI ECONOMY

Abstract

This study has examined the dynamic effect of oil prices on key variables of the economy of Saudi Arabia. This study has investigated the dynamic effect of oil price variations on Saudi stock market index, industrial production, real exchange rate, and consumer price index. This study used monthly data that begun from January 1994 to September 2014 and analyzed the impact of oil price on relevant variables. The analysis was done using the granger causality test, variance decomposition analysis, and impulse response functions. Findings of this work showed oil prices fluctuation have a positive impact on the variables of interest. The result showed that industrial production, stock market index, consumer price index and real exchange rate exhibited a positive response to a one unit shock in oil prices. Thus, the results have confirmed that industrial production; consumer price index, stock market index, and real exchange rate can be translated dependent on the oil price variation. Thus, this study has provided the understanding of the interaction between oil prices and key variables of the Saudi economy