The paper aims to examine the impacts of expansionary monetary policies in Saudi Arabia by assessing their effectiveness in both short-term economic recovery and long-term economic sustainability by separating the associated short-term dynamic impacts from long-run equilibrium relationships.
Econometric modeling of quantitative data using a vector error correction model with exogenous variables (VEC-X) on annual time-series data from 2007 to 2022 allowed for an exploration of the relationships between monetary policy instruments and macroeconomic indicators such as employment rates, inflation and investment patterns within the Saudi context.
Empirical results from the VEC-X model confirm a stable long-run equilibrium relationship among the non-stationary variables. However, the short-term dynamics reveal a significant policy trade-off. While inflation responds rapidly to monetary shocks, key indicators like unemployment and investment are unresponsive in the short term. This challenges the view that monetary policy can reliably boost broad economic activity, highlighting its limited role in short-term stabilization beyond influencing prices.
The primary limitation of the study is the small sample size, which constrained the VEC-X model to a single lag and precluded a more complex analysis of short-term dynamics. Future research could build upon these findings using higher-frequency data.
The study’s findings can guide the implementation of monetary policies by suggesting a coordinated approach. Whereas monetary instruments are best suited for maintaining long-term price stability, more immediate goals should be addressed with targeted fiscal and structural reforms.
This research offers a twofold contribution. Empirically, it uses the VEC-X framework to separate the short-term and long-term effects within Saudi Arabia’s unique economic structure. Theoretically, it provides evidence on the limitations of conventional monetary policy transmission in a dollar-pegged, resource-dependent economy, highlighting the need for adjustments to standard policy frameworks.
