Asymmetric responses of money demand to oil price shocks in Saudi Arabia: a non-linear ARDL approach |
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Authors: | Mouyad Alsamara Zouhair Mrabet Michel Dombrecht Karim Barkat |
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Institution: | 1. Finance and economics Department, Qatar university, Doha, Qatar;2. Department of Economics, University of Antwerp and The Hub Brussels, Antwerp, Belgium |
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Abstract: | Saudi Arabia is an open oil-based economy with fixed exchange rates; therefore, it has limited monetary policy autonomy. Using non-linear autoregressive distributed lag approach, this article investigates the asymmetric effects of oil price shocks on the demand of money in Saudi Arabia over the period 1990:Q1–2014:Q4. The empirical results show evidence of positive long run but asymmetric effects of oil price shocks on the money demand. In particular, we find that the positive oil price shocks are more important than negative shocks. Therefore, two policy responses can be considered: either sustaining the fixed exchange rate regime and following an economic diversification policy or switching towards a flexible exchange rate regime to achieve price stability. In that case, the existence of a stable money demand function in Saudi Arabia is a necessary precondition for adopting a monetary policy strategy targeted to price stability using instruments like money targeting. |
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Keywords: | Demand for money oil price asymmetric effects and non-linear ARDL |
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