Two essays on the sources of macroeconomic fluctuations and fiscal policy sustainability in oil-based economies: The case of Saudi Arabia

The dissertation consists of an introduction, two essays, and conclusions. It focuses on macroeconomic fluctuations and fiscal policy sustainability in Saudi Arabia.; The first chapter focuses on the nature and structure of major economic activity and policy in Saudi Arabia. It provides a general description of major macroeconomic variables in the country. Furthermore, it evaluates oil policy as well as fiscal and monetary policies during the study period.; The second chapter analyzes sources of fluctuations in the major macroeconomic variables in the Saudi economy; namely world output, oil prices, domestic output (oil and non-oil output), the real exchange rate, the real money balances, and inflation, by utilizing a structural VAR methodology. The empirical model applies six different types of structural innovations: foreign shocks, oil price shocks, domestic supply shocks, trade balance shocks, aggregate demand shocks, and monetary shocks. The impacts of these shocks on the dynamic movements of the macroeconomic variables are shown by impulse response functions, while the relative significance of the shocks to the macroeconomic fluctuations are analyzed through the use of variance decompositions derived from the structural VAR model. Following the work of Keating (2002), the structural VAR model is estimated by the long-run methodology. On the other hand, the long-run restrictions are based on both the mechanism of international oil market and the economic implications from the stochastic Mundell-Fleming model developed by Clarida and Gali (1994) and Prasad (1998).; Chapter three deals with the problem of fiscal sustainability and examines if policymakers systematically adjust fiscal policy to reduce the deficit and stabilize output. This chapter consists of three sections. In the first section, we empirically investigate the sustainability of fiscal policy in Saudi Arabia. We apply several econometric approaches to test the sustainability of fiscal policies. The results show that fiscal policy does not follow a process that satisfies the, present-value borrowing constraints. Thus, the fiscal policy is regarded as unsustainable. Moreover, we compare the path and the evolution of fiscal sustainability throughout the study sample. In the second section, we estimate several versions of fiscal reaction function, with the actual primary fiscal deficit being the key operating target of fiscal authority. In the third section, we investigate the discretionary fiscal policy and examine the output and debt stabilization motives. Three main steps are considered to analyze the discretionary policy. First, we calculate the structural deficit following the IMF methodology. Second, we estimate the reaction function with structural deficit as being the dependent variable. Third, we investigate the role of discretionary fiscal policy shocks in affecting the economic activities within a structural vector autoregressive model.