The Macroeconomic And Financial Impacts Of European Crisis On Saudi Arabia

This paper examines the contagion effect caused by the European debt crisis on the Saudi Arabian stock market and the effect’s spread to the real economy. Firstly, the presented analysis tests the hypothesis about the contagion effect and interdependence between the markets by means of Gregory and Hansen's co-integration in presence of structural breaks, as well as the test for common trends proposed by Stock and Watson (1988). Next, to identify the transmission channel of the European financial crisis to the Saudi Arabia real economy, we estimate a model with a dummy variable. Finally, we estimate a stylized Phillips curve to investigate the impact of the crisis on Saudi inflation rate. The empirical results indicate that Saudi Arabian stock market has been notably affected by the European crisis. The dummy variable model demonstrates that the primary transmission channel of the financial crisis to the Saudi Arabian output is international trading. In conclusion, the estimated stylized Phillips curve remains unchanged after the crisis. This finding indicates that the crisis has not affected the structure of the relationship between inflation and output.