Date of Award:


Document Type:


Degree Name:

Doctor of Philosophy (PhD)


Economics and Finance

Department name when degree awarded



Dwight L. Israelsen


Until the discovery of oil in Saudi Arabia, the West knew very little about the economic aspects of the country. Since then, foreign assets have grown , and the balance of payment of Saudi Arabia have reflected an accumulation of continuously rising surpluses, particularly after 1973. Real income increased and consequentIy, supply and demand for money increased.

During the period 1974-77, the Saudi economy experienced a high rate of inflation, but during the subsequent years (the late 1970s and the early 1980s) the Saudi inflation rate began declining.

The main objective of the present study is to conduct an empirical investigation analyzing the interrelationships among foreign assets, money supply, and the domestic inflation in Saudi Arabia utilizing a modeI incorporating traded and non-traded goods.

The theoretical model produces the final two equations where inflation generated in the non-traded goods sector and the overall domestic inflation represent the dependent variables, while the rate of change in the excess supply of money, world inflation, and the rate of change in last years inflation represent the explanatory variables for both dependent variabIes.

The empirical analysis reveals no significant relationship between the behavior of the excess supply of money and the behavior of inflation in Saudi Arabian economy during the entire period of study (1963-83). It indicates that neither money supply nor foreign assets has played an active role in determining the behavior of domestic inflation in the Saudi Arabian economy.

A strong relationship has been found between the inflationary expectations of the pubIic and the inflation generated in the non-traded goods sector. During the period (1963-72) imported inflation explained significantly the overall domestic inflation. But this is not so for the second period (1973-83) of study, even though inflation peaked during 1974-77. Furthermore, no structural shift in the economy occurred between these two sub-periods.

The causality test conducted confirms the empirical results where no unidirectional causality existed between the overall domestic inflation rate and the excess supply of money. However, a positive causality has been found between the world inflation rate and the Saudi overalI domestic inflation rate.

Another unidirectional causality from inflation generated in the nontradable sector to the overalI domestic inflation rate has been found. Finally, the implications of the results are discussed .

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