Title: The dynamic response patterns of output to credit: the case of Saudi Arabia

Authors: Said M. Alkhatib

Addresses: Finance and Banking Department, College of Business Administration, Al Ain University of Science and Technology, Abu Dhabi, UAE

Abstract: This paper examines the dynamic relationships between output and credit in the Kingdom of Saudi Arabia for the sample period 1971-2012 using annual data. The study uses the VECM in which the non-oil private real GDP and real credit are included as endogenous variables. The estimated VECM provides empirical evidence suggesting roughly the weak involvement of the banking sector in the economic activity. However, the residual patterns suggest a possible specification error that can be attributed to wrong functional form or excluding some relevant variables. To avoid this potential problem the government spending and several dummy that may reflect the major developments in the credit behaviour are incorporated in the model. The estimated new VECM yields empirical evidence suggesting the importance government spending and credit in driving the economic activity. In addition, the model shows a better explanatory power.

Keywords: stationary; vector error correction model; VECM; credit behaviour; cointegration; specification error; output-credit nexus; Saudi Arabia; GDP; gross domestic product; banking industry; government spending.

DOI: 10.1504/IJEBR.2016.074423

International Journal of Economics and Business Research, 2016 Vol.11 No.1, pp.11 - 25

Received: 08 May 2015
Accepted: 06 Oct 2015
Published online: 29 Jan 2016 *

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