Testing for Causality between Oil Prices and Money Supply in Saudi Arabia

Abstract

The impact of oil price shocks on a country’s economy has been well studied in the economic literature. However, until now, articles analyzing the impact of these shocks on the Saudi Arabian economy have been relatively sparse. This paper attempts to shed some light on this important topic by examining the causal relationship between oil prices and an important monetary variable, the M3 (broad-based) money supply. Monthly data going back to 1982 were used in this study, which employs unit root tests and Granger causality analysis to test whether there is a causal relationship or not. No discernable causality relationship was found; this lack of such link leads the authors to conclude that this may be due to the prudent and stable fiscal and monetary policy on the part of the Kingdom’s government and its central bank, the Saudi Arabian Monetary Authority (SAMA).