Oil Price Shocks, Monetary Policy Transmission, and Non-Oil Output Dynamics in Saudi Arabia: Evidence from a VAR Analysis

This study examines the dynamic interactions between oil price shocks, monetary policy, and non-oil output in Saudi Arabia using Vector Autoregressive Model (VAR), and quarterly data spanning 2010: Q1–2025: Q3. The study aims to provide policy-relevant insights through which external oil price shocks and domestic monetary policy shocks affect inflation and non-oil economic activity in the context of Saudi Arabia’s structural transformation under Vision 2030. The results show that global oil prices behave largely as exogenous shocks, with limited feedback from domestic monetary conditions, implying that monetary policy effectiveness operates primarily through inflation and domestic demand channels rather than through oil prices directly. The findings underscore the importance of gradual and predictable monetary tightening, coordinated with fiscal and macroprudential policies, to mitigate the indirect spillovers of oil price volatility on the non-oil sector. While monetary policy plays a stabilizing role by containing inflation and supporting macroeconomic balance, sustaining diversification and non-oil growth under Vision 2030 requires complementary measures, including targeted credit support, financial market deepening, and structural reforms that enhance productivity and private-sector investment.