Measuring the Macroeconomic Impacts of Fiscal Policy Shocks in the Saudi Economy : A Markov Switching Approach

This study aims to highlight whether macroeconomic aggregates respond significantly to fiscal policy shocks for the Saudi economy from 1969 to 2015. Contrary to prior studies, our analysis opts for a recent and robust technical setting within the framework of multivariate two-state Markov switching models. The findings indicate that the model is well suited to deal accurately with switching behaviour of the cointegrated relationships due to international economic events. The impulse response analysis reveals that government spending changes have a significant impact on output, consumption, investment, and reserves, with varied reactions for the last two aggregates across regimes. The effects are persistent throughout the impulse response horizon, except for reserves over the second regime. In comparison with an analysis based on a single regime model, the results point to the importance of differentiating the impulse responses between two regimes in order to maximize the effectiveness of the fiscal policy. The findings could help policymakers to establish efficient economic decisions to boost the economy. Favourable economic repercussions may result from an effective policy coordination in decision making.