Asymmetric effect of consumption expenditure on import function in Saudi Arabia

We study the asymmetric effect of consumption expenditure on Saudi imports from 1991 to 2020. We found a direct relationship between consumption expenditure and imports both in short and long-run periods, however, the positive shocks in consumption expenditures have a dominant impact in the long run. We included several control variables, i.e. non-oil GDP growth, export, public debt, and real effective exchange rate (REER) as a proxy of relative price. We found that income elasticity for imports is elastic in the short run. While Exports impact imports positively in the short and long run, the Public Debt hurts it. Exchange rate appreciation induces the demand for imports. Moreover, imports were price-inelastic in the short and long run. The next-level analysis also confirmed the consumption expenditure as one of the key factors in determining Saudi imports. It further identified the bi-directional causalities between these macroeconomic variables, i.e. import causes consumption expenditure, consumption expenditure causes import, export causes consumption expenditure, non-oil GDP growth causes consumption expenditure, and non-oil GDP growth causes import. These findings are validated by the relevant diagnostics tests. Our empirical findings can be useful as a reference for future research and policy implications.