Oil Prices Dynamic Effect on the Economy

Oil is one of the most important factors that affects the economy of Saudi Arabia. Previous studies showed that oil prices can affect the growth of the economy especially in oil exporting countries. As oil represents approximately 90% of the exports, and almost 75% of government revenues and with the recent prices decline, the study of the dynamic effect of oil prices volatility is of great importance. This study aims to investigate the dynamic effect between oil prices variations and Saudi Stock Market, Gross Domestic Production ¿GDP¿, Real Exchange Rate, and Inflation. The study uses monthly data starting from January 1994 to September 2014. The Granger causality test, variance decompositions test, and impulse response functions model. This study improves the understanding of the interaction between oil prices and key variables of the Saudi Arabia economy. It extends the literature by involving an updated period and applying new model application. It provides more clarification to financial regulators and policy makers in formulating economic and financial policies.