The Relative Strength of Fiscal and Monetary Policy in Saudi Arabia

In the early 1960s Milton Friedman and David Meiselman1 undertook a series of statistical comparisons of several simple forms of Keynesian and Quantity Theory models. While their results came under sharp criticism2, their results clearly demonstrated that in the United States at least, money rather than autonomous expenditures provides a better explanation of changes in monetary income. Given its assumption of relatively flexible prices and the development of a fairly sophisticated financial system, the quantity theory would with the exception to some of the Newly Industrializing countries such as Singapore, and Taiwan, seem to be more applicable to the advanced industrialized nations. On the other hand the Keynesian model with its underlying assumptions of price rigidity, factor immobility, and underdeveloped capital markets, would seem to be more appropriate for depicting the relative strength of fiscal variables in the developing countries3. Intuitively, given the importance of oil revenues and government expenditures as a driving force in the Saudi Arabian economy, one might expect that monetary expansion would at most play secondary role in inducing expenditures4. For example Kernan and Malik argue that in the Saudi Arabian contextS Real income is dependent as of the late 19705 upon the ability to import goods and services rather than the ability to produce goods and services other than oil 2. Government spending, even with a budget surplus, can still imply stimulative fiscal policy because most government revenues comes from abroad and 3. Stimulative fiscal policy leads directly to an increase in the money supply because of the underlying structure of the countrys financial markets i.e., their general underdevelopment. In fact, several observers have even gone so far as to refer to the Saudi Arabian economy as one of the purest present day examples of a classic Keynesian type economy.