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Estimating Optimal Inflation Rate in Saudi Arabia: Using Dynamic Threshold Regression Model

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  • Soleman O. Alsabban
  • Sarah N. Alnuwaiser

Abstract

This study evaluates the relationship between inflation and the output gap in Saudi Arabia. Specifically, it determines a level of optimal inflation for the output gap given the changes in the economic cycle. The novelty of this study’s research question is linking optimal inflation with the non-oil output gap in Saudi Arabia by constructing a dynamic threshold regression model. The estimation is carried out by using a yearly time series from 1981 to 2019. The variables used in our model are based on existing economic theories that have established a correlation between the GDP gap as the dependent variable and inflation, money supply, and total exports as explanatory variables. The results obtained in this study suggest the existence of a threshold level of inflation of which the turning point is located at 3 percent.

Suggested Citation

  • Soleman O. Alsabban & Sarah N. Alnuwaiser, 2021. "Estimating Optimal Inflation Rate in Saudi Arabia: Using Dynamic Threshold Regression Model," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 13(3), pages 1-40, March.
    • Handle: RePEc:ibn:ijefaa:v:13:y:2021:i:3:p:40
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    References listed on IDEAS

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    1. Abdulrahman Al-Hamidy, 2011. "Monetary policy in Saudi Arabia," BIS Papers chapters, in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 301-305, Bank for International Settlements.
    2. Raghbendra Jha & Tu Ngoc Dang, 2012. "Inflation variability and the relationship between inflation and growth," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 5(1), pages 3-17, July.
    3. Baharumshah, Ahmad Zubaidi & Slesman, Ly & Wohar, Mark E., 2016. "Inflation, inflation uncertainty, and economic growth in emerging and developing countries: Panel data evidence," Economic Systems, Elsevier, vol. 40(4), pages 638-657.
    4. Fischer, Stanley, 1993. "The role of macroeconomic factors in growth," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 485-512, December.
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    Cited by:

    1. George Kosgei Kiptum, 2022. "Relationship between Kenya’s economic growth and inflation," SN Business & Economics, Springer, vol. 2(12), pages 1-16, December.

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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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