A Multiple and Partial Wavelet Analysis of the Oil Price, Inflation, Exchange Rate, and Economic Growth Nexus in Saudi Arabia

ABSTRACT

This article provides a fresh insight into the dynamic nexus between oil prices, the Saudi/US dollar exchange rate, inflation, and output growth rate in Saudi Arabia’ economy, using novel Morlet’ wavelet methods. Specifically, it implements various tools of methodology: the continuous wavelet power spectrum, the cross-wavelet power spectrum, the wavelet coherency, the multiple and the partial wavelet coherence to the annual sample period 1969–2014. Our results unveil that the relationships among the variables evolve through time and frequency. From the time-domain view, we show strong but non-homogenous linkages between the four variables. From the frequency-domain view, we uncover significant wavelet coherences and strong lead-lag relationships. From an economic view, the wavelet analysis shows that Saudi economy is still exposed to several global risk factors, which are mainly related to the oil market volatility, and the pegging of the local currency to the US dollar. Such risk factors strongly and negatively affect the real economic growth, exert more pressure on inflation, and substantially limit the freedom to pursue an independent monetary policy.

KEY WORDS:

• cross-wavelets
• FX rate
• GDP growth
• inflation
• multiple wavelet coherence
• oil price
• partial wavelet coherency
• wavelet coherency
• wavelets

JEL Codes:

• C49
• E31
• E51
• E5

Acknowledgments

The authors are grateful to the Editor Professor A. Kutan and to the two anonymous reviewers for their helpful comments and suggestions. C. Aloui would also like to extend his sincere appreciation to the Deanship of Scientific Research at King Saud University for financial support of this research through the Research Group Project [RGP-211].

Notes

^1. See, among others, Hamilton 1983, 1985, 2008, 2011; Naccache 2011; Aguiar-Conraria and Wen 2007; and Aguiar-Conraria and Soares 2011.

^2. Saudi Arabia’s 2015 budget planned for $229 billion in expenditure, with revenues at $191 billion, leaving a $38.6 billion in deficit. (Financial times, 15th January 2015).

^3. For more details about the theoretical issue, which is why increases in oil prices coincide with a deceleration in output growth and rising inflation, see Brown and Yücel (2002).

^4. Brown and Yücel (2002) give details concerning the role of monetary policy.

^5. See, for example, Akoum et al. 2012; Naifer and Dohaimani 2013; Aloui and Hkiri 2014; and Aloui et al. 2016.

^6. A detailed presentation of the wavelets is reported in Appendices A and B.

^7. For more details, see Ng and Chan 2012, p.1850.

^8. The data are available on the link: data.worldbank.org/data-catalog/world-development-indicators.

^9. The data are available on the link: http://www.eia.gov/dnav/pet/hist/.

^10. To honor space constraint, the equations inherent to the other pairwise relationships are not reported here. Also, the cointegration results are not reported here but are available upon request addressed to the corresponding author.

Additional information

Funding

This work was supported by the Deanship of Scientific Research, King Saud University (RGP-211).