A macroeconometric model of an oil-based economy: Case study of Saudi Arabia

The objectives of this study were to construct a macroeconometric model for the Saudi Arabian economy for the period 1962-1990 that describes the characteristics of the Saudi economy, to examine the economy's stability over time, and to get a statistical explanation of the economic and non-economic forces which determine the country's capacity for economic growth. Moreover, this study was particularly interested in examining and evaluating the impacts of fluctuations of the recent developments in world oil prices on the economy of Saudi Arabia, a country which depends heavily on oil revenues as the major source of income. In order to execute these objectives, a macroeconometric model of the Saudi economy was built based on annual data for the period 1962-1990. The model contained twenty-nine relations, of which twenty are structural behavioral equations and nine are definitions and identities.;The validation and the predictive ability of the model was achieved via dynamic historical simulation for the period 1962-1990 to show how closely each simulated endogenous variable tracked its actual values. The overall results of the dynamic historical simulation for the complete model showed that the simulated values for most of the endogenous variables not only tracked their actual values closely, but they also tracked the turning points in the historical data.;Having established the validation and the predictive ability of the model, the constructed model was used to perform ex-ante simulations for the future values of the major macroeconomic variables based on two different scenarios for the period 1991-2005. The future of the Saudi economy was simulated and examined under two alternative future scenarios. A comparison of the results of these scenarios shows the impacts of the fluctuations in the oil prices on the Saudi economy. In Scenario I, where we did not set aside a stabilization fund reserve, we found that the key endogenous variables had a lower increase relative to the stabilization fund scenario. However, under the stabilization fund scenario (where we set aside each year ten percent of government oil revenues and use this money as a reserve fund for stabilization goals), we found that the major macroeconomic variables in the Saudi economy maintained a stable path of economic growth and the government sustained a steady path of government expenditure since we used this stabilization fund to stabilize macroeconomic activities and capture the effect of the fluctuations in oil prices.