Effect of Budget Deficit on Monetary Policy in Saudi Arabia
Abdullah A. Alshebel and Adnan J. Al-Hessen
Department of Economics, College of Business
King Saud University, Riyadh, Saudi Arabia
This study examines the impact of the budget deficit on the monetary policy in Saudi Arabia. To achieve this goal, an econometric model was developed and estimated using data for the period 1970-1995.
The results revealed that the budget deficit in Saudi Arabia was one of the main determinants of monetary policy. It shows that the Saudi Arabian Monetary Agency (SAMA) is not totally independent of the fiscal policy. In addition, this study shows that the balance of payments, budget deficit, and price stability are the main goals of the monetary policy in Saudi Arabia. Based on these results, it is concluded that monetary policy effectiveness requires reducing the internal and the external budget deficit.