Assessing the Macroeconomic Implications of Oil Price Fluctuations in Saudi Arabia: An SVAR-based Study

Abstract This study aims to analyse the impact of oil price fluctuations on the major macroeconomic indicators of the Saudi Arabian economy, including gross domestic product, total revenue, inflation, money supply, and real exchange rate. This study utilises Structural Vector Auto-Regression (SVAR) analysis to investigate the influence of oil price shocks on macroeconomic indicators. This research validates the previous findings indicating an increase in oil prices positively impacts GDP and total revenue. This study provides evidence that inflation exhibits minimal responsiveness to fluctuations in oil prices. Regarding the variable of interest, namely the Real Effective Exchange Rate (REER) and money supply, it was observed that these variables had a substantial effect on the shock in oil prices. The results have important policy implications, providing an understanding of how Saudi Arabia’s macroeconomic factors respond to changes in oil prices, and highlighting the importance of strengthening and expanding the financial sector per the diversification objectives of Vision 2030.