THE JOURNAL OF ENERGY

AND DEVELOPMENT

Moayad Al Rasasi and Waheed A. Banafea

“The Effects of Oil Shocks on

the Saudi Arabian Economy,”
Volume 41, Number 1

Copyright 2016
 THE EFFECTS OF OIL SHOCKS ON THE
SAUDI ARABIAN ECONOMY

Moayad Al Rasasi and Waheed A. Banafea*

Introduction

R esearch into the impacts of oil shocks on economic activities has intensified in
the decades following the 1970s price shocks. Academicians have been in-
terested in the macroeconomic ramifications of price fluctuations of this vitally
important commodity for both oil-importing and oil-exporting nations. J. Hamilton
was a pioneer in the field with his contribution showing the crucial impacts of the
1970s oil shocks on economic activity.1 Hamilton’s seminal 1983 work examines
the effects of oil price shocks on the U.S. economy using a vector autoregressive
(VAR) model. He not only finds a negative relationship between oil shocks
and gross domestic product (GDP) growth but also finds that seven out of
eight of U.S. postwar recessions were preceded by oil shocks. Hamilton’s
work motivated much of the literature focusing on the effects of oil shocks on

* Moayad Al Rasasi earned a B.S. degree in quantitative methods from King Saud University
in Saudi Arabia, a master’s degree in economics from the University of Kansas, and a Ph.D. degree
in economics from Kansas State University. Dr. Al Rasasi currently is an economic specialist in
the economic research department at the Saudi Arabian Monetary Agency. His research interests
include macroeconomics, energy economics, time-series econometrics, and international finance.
Waheed Banafea, Assistant Professor at the Institute of Public Administration (IPA) in Riyadh,
Saudi Arabia, holds a Ph.D. in economics from Kansas State University and master’s and bachelor’s
degrees in economics from Ohio University and King Saud University, respectively. The author’s
areas of academic expertise are econometrics, regional economics, and international finance.
Dr. Banafea is currently the Director of the Department of Economics and Budget at IPA. The
author’s academic research focuses on projects in economics such as stability of money demand,
energy consumption, and assessment of fiscal sustainability.

The Journal of Energy and Development, Vol. 41, Nos. 1 and 2

Copyright Ó 2016 by the International Research Center for Energy and Economic Development
(ICEED). All rights reserved.
31
32 THE JOURNAL OF ENERGY AND DEVELOPMENT

various economic activities, such as output (J. Hamilton, K. Mork, M. Hooker,

and L. Kilian),2 inflation (R. Barsky and L. Kilian, and L. Bachmeier and I. Cha),3
financial markets (L. Bachmeier, and L. Kilian and C. Park),4 exchange rates
(R. Amano and S. Norden, S. Chen and C. Chen, and H. Mohammadi and M. Jahan-
Parvar),5 monetary policy (B. Bernanke et al., and J. Hamilton and A. Herrera),6
fiscal policy (A. El Anshasy and M. Bradley),7 trade balance (T. Le and Y. Chang),8
terms of trade (D. Backus and M. Crucini),9 employment (S. Davis and J.
Haltiwanger),10 and industry-level output (K. Lee and S. Ni)11 for both developed
and developing countries. L. Kilian provides a comprehensive literature review
regarding the consequences of oil shocks on economic activity.12
The literature contains a fair amount of research on the effects of oil price
shocks in oil-producing countries, such as Algeria (C. Bouchaour and H. Al-
Zeaud),13 Canada (L. Kilian),14 Russia (K. Ito, and C. Fang and S.You),15 Mexico
(N. Cantore et al.),16 Norway (C. Baumeister et al.),17 and Venezuela (O. Mendoza
and D. Vera).18 However, Saudi Arabia, which is a major global oil-producing
country, has not received much attention. The academic literature examining the
effects of oil price shocks on the Saudi economy is scarce. There are a limited
number of studies focusing on the effects of oil price shocks on the Saudi stock
market, exchange rate, and inflation. H. Mohammadi and M. Jahan-Parvar explore
the influential role of oil prices on real exchange rates for oil-producing countries,
including Saudi Arabia, and find that higher oil prices lead to the appreciation of
the real exchange rates in those countries; in other words, they find evidence
consistent with the Dutch disease hypothesis.19 Likewise, other studies, such as
M. Arouri et al., look into the potential effects of oil price shocks on stock markets
in member countries of the Gulf Cooperation Council (GCC), including Saudi
Arabia, and conclude that oil prices affect the Saudi stock market positively.20
Other studies, such as the Federal Reserve Bank of Dallas, report that a decline in
oil prices by $1 leads to a decline in Saudi oil revenue by $2.5 billion every year.21
Furthermore, E. Aleisa and S. Dibooglu document that Saudi Arabia’s role in the
oil market influences world inflation and that, in turn, is transmitted to the in-
flation of Saudi Arabia through import channels.22
Most prior research has focused on the effects of oil supply shocks on world
economies, including the Saudi economy. In his 2009 work, L. Kilian constructs
new oil shocks to differentiate between oil supply shocks and oil demand shocks.23
The author addresses the endogeneity of oil prices and supports the idea of dif-
ferential effects of oil shocks depending on the source of these shocks. He argues
that spikes of oil prices after 2003 did not cause any major recessions, and these
surges in oil prices primarily were driven by higher global economic growth that
led to higher global demand for oil. Additionally, he argues that aggregate de-
mand shocks have the largest effects compared to oil-specific demand shocks
and oil supply shocks. Several studies apply Kilian’s methodology to investigate
the differential effects of oil shocks on stock markets (L. Kilian and C. Park),24
 OIL SHOCKS & SAUDI ARABIA 33

monetary policy (L. Kilian and L. Lewis),25 and external balances (L. Kilian
et al.).26
This paper examines the differential effects of oil price shocks on the
economic activity of Saudi Arabia. In other words, we follow Kilian27 by
identifying oil supply and demand shocks to investigate the response of in-
dustrial production, inflation, and the nominal effective exchange rate to an oil
supply shock, an aggregate oil demand shock, and an oil-specific demand
shock.
The reminder of this paper is organized as follows. The subsequent section
provides a data description and thereafter by a discussion on the methodology.
This is followed by the reporting of our empirical findings and our paper’s
conclusions.

Data

Our dataset consists of industrial production, the consumer price index, nom-
inal effective exchange rate, world crude oil production, producer price index
(PPI) for petroleum as a measure for world oil prices, and global real economic
activity. The dataset contains monthly observations ranging from February 1980
to February 2014 and are obtained from a variety of sources. The data for in-
dustrial production, nominal effective exchange rate, and the consumer price in-
dex for Saudi Arabia are downloaded from the International Financial Statistics
of the IMF database. The producer price index (PPI) for petroleum, global
economic activity index, and global crude oil production are obtained from the
websites of the U.S. Bureau of Labor Statistics (BLS), the webpage of Lutz
Kilian, and the U.S. Energy Information Administration (EIA), respectively.
Hereafter, the following notations are used: global crude oil production = Prodt,
real economic activity index = REAt, real oil price = OPt, industrial production =
IPt, consumer price index = CPIt, and nominal effective exchange rate = NERt, at
time t. It is also important to emphasize that all variables, except REA, are
expressed in log form.

Empirical Methodology

Unit Root Tests: The initial step of our analysis involves ascertaining
the stationarity of economic variables. To do so, we rely on standard unit root tests,
i.e., the augmented Dickey-Fuller28 and Phillip-Perron29 tests. Both tests confirm
the nonstationary status of economic variables in their levels, but not in their first
differences, which means that all the variables are integrated of order 1, I (1). The
detailed results are available from the authors upon request.
34 THE JOURNAL OF ENERGY AND DEVELOPMENT

The Structural Vector Autoregressive Model: To examine the consequences

of various oil price shocks, we largely adopt the methodology of L. Kilian,
L. Kilian and C. Park, and L. Kilian et al.30 We follow a two-stage approach. In the
first stage, we identify the oil supply, aggregate demand, and oil-specific demand
shocks using a recursive identification scheme. The second stage consists of
conditioning the macroeconomic variables on the shocks identified in the first
stage.
In the first stage, we specify the vector autoregressive (VAR) model as given
by equation (1),
A0 Yt = AðLÞYt – 1 + ut ð1Þ
where Yt includes percent change of global oil production, real economic activity
index, and real world oil prices. The lag length is chosen based on the Akaike
Information Criterion (AIC) and equals 12; this lag length is much shorter than 24
used by L. Kilian and C. Park.31 However, we follow L. Kilian and L. Kilian et al.
in identifying oil supply shocks, aggregate demand shocks, and oil-specific de-
mand shocks based on a recursive (Cholesky) scheme in which global crude oil
production is the most exogenous variable and the real oil price variable is the
most endogenous one, as shown in matrix (2).32
2 Prod 3 " 2 3
# eOil supply Shock
e1t a11 0 0
5 = a21 a22 0 6 Demand Shock 7
1t
et = 4 eREA
2t 4 eAggregate
2t 5 ð2Þ
OP Oil specific demand Shock
e3t a31 a32 a33 e3t
where the vector of oil supply shocks, aggregate demand shocks, and oil-specific
demand shocks is:
 supply  shock Agg:demand  shock oil  specific  demand  shock 
^et = eoil 
1t ,  e2t ,  e3t :

It is also worth noting that Kilian indicates oil supply shocks measure the
availability of crude oil, referring to the unpredictable changes in crude oil pro-
duction. Aggregate oil demand shock measures the global business cycle, referring
to the unpredictable changes in real economic activity that cannot be explained by
supply shocks. Oil-specific demand shocks measure changes in the demand for oil
that is driven by precautionary motives and refers to the unpredictable changes in
the real price of oil that cannot be explained by a supply shock or an aggregate
demand shock; figure 1 shows the plots of these shocks.
After identifying the various oil shocks, we examine the effect of various
oil shocks on macroeconomic variables by conditioning the identified oil
shocks on the economic variable of interest, e4tEcon, recursively, as shown in
matrix (3).
 OIL SHOCKS & SAUDI ARABIA 35

2 3 2 2 3
3 eOil supply Shock
eProd a11 0 0 0 6
Demand Shock 7
1t 1t
6 eREA 7 6 0 7 6 eAggregate 7
et = 6 2t 7
4 eOP 5 = 4
a21 a22 0 56 Oil
2t
specific demand Shock 7
ð3Þ
3t a31 a32 a33 0 4 e3t 5
eEcon a41 a42 a43 a44 eOther Econ Shocks
4t 4t

After estimating the structural VAR model given by matrix (3), we calculate
and analyze the impulse response functions (IRF) with a 95-percent confidence
intervals based on the fixed-design wild bootstrap, as described in S. Goncalves
and L. Kilian, with 1,000 replications.33

Empirical Findings

Figure 2 displays the results of the impulse response functions (IRFs),

which show the reactions of the economic activity (IP), inflation (CPI), and
nominal effective exchange rate (NER) to the oil supply shocks, aggregate
demand shocks, and oil-specific demand shocks. The impact of unpredictable

Figure 1
STRUCTURAL SHOCKS DECOMPOSITION, 1980–2014
36 THE JOURNAL OF ENERGY AND DEVELOPMENT

oil supply shocks on the IP growth, as seen in figure 2A, starts to be positive
and reaches its peak in the third month. The confidence interval bands indicate
that the IRF is accurate, since they followed the response pattern nicely
throughout the period. This is consistent with the view that contractions of oil
supply would lead to an increase in oil prices. Therefore, the oil revenue for
countries such as Saudi Arabia, which depends heavily on oil, would increase
and affect economic growth positively through the increase in aggregate de-
mand. Saudi Arabia gained from the energy crises (1973 Arab-Israel War and
1979 Iranian Revolution), and spent most of the oil revenues on a large de-
velopment effort.
The IRF, as show in figure 2D, displays a statistically insignificant positive
impact of an unpredictable supply disruption on inflation. The economic intuition
behind the result of IRF is that the oil supply contractions cause an increase in oil
prices, which would lead to an increase in inflation through the increase in ag-
gregate demand. Thus, the response of inflation to the supply shock would be
positive in the case of Saudi Arabia.
The NER responds negatively to oil supply shocks as figure 2G shows. It starts
with a negative effect in the first month and reaches the bottom in the ninth month.
The lower confidence interval is on the negative side of the axis, which indicates
that the impact of the oil supply shock on NER is statistically insignificant. The
possible interpretation of the result of IRF is that the oil supply contractions cause
real oil prices to increase. As a result, the Saudi exports of oil become relatively
expensive, and that would decrease its oil exports. Thus, the nominal effective
exchange rate of Saudi Arabia will depreciate.
Figure 2B illustrates the positive effect of an unpredictable aggregate demand
shock on the IP growth is small and statistically insignificant. The response of IP
growth to the aggregate demand shock begins with an immediate small increase in
the second month and reaches the peak in the tenth month. The result of the IRF is
consistent with the economic view that an unanticipated increase in the global real
economic activity would lead to a temporary increase in the real price of oil. Thus,
the oil revenues will increase, and that will positively affect the economic growth
through aggregate demand.
An unpredictable aggregate demand shock triggers a transitory and statis-
tically significant increase in the inflation for about 12 months as figure 2E
displays. An unanticipated aggregate demand expansion of real global eco-
nomic activity will increase real oil prices. Therefore, the oil revenue will
increase and lead to an increase in government spending on development. As
a result, the aggregate demand would increase and cause inflation to increase.
Also, the expansion of real global economic activity will lead to an increase in
oil prices. Therefore, the exports of oil become relatively expensive, and
that would depreciate the nominal effective exchange rate, as illustrated in
figure 2H.
 OIL SHOCKS & SAUDI ARABIA 37

Saudi Arabia gained from the increase in oil prices in the period of 2007– 2008,
which was caused by a negative aggregate demand shock. The benefit of the
increase of oil prices was reflected by Saudi government spending in the fol-
lowing years. Government spending in 2007 was 61,756 million Riyals; this
jumped to 63,031, 79,148, and 92,017 million in 2008, 2009, and 2010,
respectively.34
The plotted IRF in figure 2C shows that there is a positive, temporary, and
statistically insignificant impact on the IP growth. The response of the IP growth to
the oil-specific demand shock starts with a small increase and peaks in the twelfth
month. The increase of oil prices in 2008 led to an increase in the total oil revenue.
As a result, the Saudi government increased its spending, which in turn affected IP
growth positively. Also the IRF, as seen in figure 2F, shows a positive, tempo-
rary, and partially significant impact of oil-specific demand shock on inflation.
However, the reaction of NER to the oil-specific demand shock is different as
figure 2I illustrates. The IRF indicates that the impact of the oil-specific demand
shock on NER is negative and statistically insignificant until the tenth month
when it starts to rise over the remaining period. Similar to the effect of an oil
supply shock on NER, the increase in real oil prices would decrease the com-
petitiveness of Saudi exports in the global market. Therefore, the Saudi exchange
rate will depreciate.

Figure 2A
RESPONSE OF INDUSTRIAL PRODUCTION (IP) TO AN OIL SUPPLY SHOCK
38 THE JOURNAL OF ENERGY AND DEVELOPMENT

Figure 2B
RESPONSE OF INDUSTRIAL PRODUCTION (IP) TO AN AGGREGATE DEMAND SHOCK

Figure 2C
RESPONSE OF INDUSTRIAL PRODUCTION (IP) TO AN OIL-SPECIFIC DEMAND SHOCK
 OIL SHOCKS & SAUDI ARABIA 39

Figure 2D
RESPONSE OF CONSUMER PRICE INDEX (CPI) TO AN OIL SUPPLY SHOCK

Figure 2E
RESPONSE OF CONSUMER PRICE INDEX (CPI) TO AN AGGREGATE DEMAND SHOCK
40 THE JOURNAL OF ENERGY AND DEVELOPMENT

Figure 2F
RESPONSE OF CONSUMER PRICE INDEX (CPI) TO AN OIL-SPECIFIC DEMAND SHOCK

Figure 2G
RESPONSE OF THE NOMINAL EFFECTIVE EXCHANGE RATE (NER) TO AN OIL
SUPPLY SHOCK
 OIL SHOCKS & SAUDI ARABIA 41

Figure 2H
RESPONSE OF THE NOMINAL EFFECTIVE EXCHANGE RATE (NER) TO AN
AGGREGATE DEMAND SHOCK

Figure 2I
RESPONSE OF THE NOMINAL EFFECTIVE EXCHANGE RATE (NER) TO AN
OIL-SPECIFIC DEMAND SHOCK
42 THE JOURNAL OF ENERGY AND DEVELOPMENT

The impact of the shocks on NER is not consistent with the economic theory
expectations; for instance, we expect oil shocks to lead to the appreciation of oil-
producing currencies such as Saudi Arabia’s, as shown by H. Mohammadi and
M. Jahan-Parvar, who confirm the validity of “Dutch disease hypothesis.”35
However, we find that the structural oil shocks lead to the depreciation of the
nominal effective exchange rate; this might be due to an increase in real oil prices,
which decrease the competitiveness of Saudi exports in the global market.
Therefore, the Saudi exchange rate will depreciate.

Conclusion

The aim of this paper is to empirically investigate the differential effects of oil
price shocks on the economic activity of Saudi Arabia. This paper utilized the
measures of oil shocks initiated by L. Kilian.36 The methodology of L. Kilian,
L. Kilian and C. Park, and L. Kilian et al. were applied to examine the conse-
quences of various oil shocks.37 The results of IRF indicated that the impact of the
three shocks, oil supply shock, aggregate demand shock, and oil-specific demand
shock on IP growth were positive and statistically insignificant except for the oil
supply shock.
Moreover, the IRF showed that the effect of the structural oil shocks on in-
flation was positive and statistically significant except for the supply shock. In-
teresting results were observed about the effect of the three shocks on the nominal
effective exchange rate. The IRF displayed negative and statistically insignificant
impacts of the oil supply shock, aggregate demand shock, and oil-specific demand
shock on the NER.
Only oil supply shock and aggregate demand shock have a positive and sta-
tistically significant impact on IP and inflation in Saudi Arabia, respectively. An
anticipated increase of oil prices, whether caused by oil supply shock or aggregate
demand shock, will lead to an increase in oil revenue. Consequently, government
spending will increase, which, in turn, will push aggregate demand up and increase
IP growth and inflation in Saudi Arabia.
The results of this paper are useful for policy makers, especially in Saudi
Arabia, in formulating monetary policy. Policy makers of monetary policy may
adopt a technique called inflation targeting to control the rise in inflation.
Therefore, the central bank may lower or raise interest rates in order to reach the
target inflation, and this may increase the stability of the economy. An important
advantage of inflation targeting is that it combines two elements: a response of
economic shocks in the short run, and an accurate numerical target for inflation in
the medium term.
For future research, it is important to investigate the effect of the three shocks
on other economic sectors such as labor markets, the stocks and bonds market, and
 OIL SHOCKS & SAUDI ARABIA 43

the international trade markets to help policy makers in formulating sound fiscal
and monetary polices.

NOTES
1
J. Hamilton, “Oil and the Macroeconomy since World War II,” Journal of Political Economy,
vol. 91, no. 2 (1983), pp. 228–48.
2
Ibid.; J. Hamilton, “This is What Happened to the Oil Price-Macroeconomy Relationship,”
Journal of Monetary Economics, vol. 38, no. 2 (1996), pp. 215–20; J. Hamilton, “What is an Oil
Shock?” Journal of Econometrics, vol. 113, no. 2 (2003), pp. 363–98; K. A. Mork, “Oil and the
Macroeconomy When Prices Go Up and Down: An Extension of Hamilton’s Results,” Journal of
Political Economy, vol. 97, no. 3 (1989), pp. 740–44; M. A. Hooker, “This is What Happened to the
Oil Price-Macroeconomy Relationship?” Journal of Monetary Economics, vol. 38, no. 2 (1996), pp.
221–22; and L. Kilian, “A Comparison of the Effects of Exogenous Oil Supply Shocks on Output
and Inflation in the G7 Countries,” Journal of the European Economic Association, vol. 6, no. 1
(2008), pp. 78–121.
3
R. B. Barsky and L. Kilian, “Do We Really Know That Oil Caused the Great Stagflation?”
NBER Macroeconomics Annual 2001, vol. 16 (2002), pp. 137–98, and L. Bachmeier and I. Cha,
“Why Don’t Oil Shocks Cause Inflation? Evidence from Disaggregate Inflation Data,” Journal of
Money, Credit and Banking, vol. 43, no. 6 (2011), pp. 1165–183.
4
L. Bachmeier, “Monetary Policy and the Transmission of Oil Shocks,” Journal of Macro-
economics, vol. 30, no. 4 (2008), pp. 1738–755, and L. Kilian and C. Park, “The Impact of Oil Price
Shocks on the U.S. Stock Market,” International Economic Review, vol. 50, no. 4 (2009), pp.
1267–287.
5
R. A. Amano and S. van Norden, “Exchange Rates and Oil Prices,” Review of International
Economics, vol. 6, no. 4 (1998), pp. 683–94; S.-S. Chen and H.-C. Chen, “Oil Prices and Real
Exchange Rates,” Energy Economics, vol. 29, no. 3 (2007), pp. 390–404; and H. Mohammadi and
M. R. Jahan-Parvar, “Oil Prices and Exchange Rates in Oil-Exporting Countries: Evidence from
TAR and M-TAR models,” Journal of Economics and Finance, vol. 36, no. 3 (2012), pp. 766–79.
6
B. S. Bernanke, M. Gertler, and M. Watson, “Systematic Monetary Policy and the Effects of
Oil Price Shocks,” Brookings Papers on Economic Activity, vol. 28, no. 1 (1997), pp. 91–157, and
J. Hamilton and A. M. Herrera, “Oil Shocks and Aggregate Macroeconomic Behavior: The Role
of Monetary Policy: Comment,” Journal of Money, Credit and Banking, vol. 36, no. 2 (2004), pp.
265–86.
7
A. A. El Anshasy and M. D. Bradley, “Oil Prices and the Fiscal Policy Response in Oil-
Exporting Countries,” Journal of Policy Modeling, vol. 34, no. 5 (2012), pp. 605–20.
8
T. H. Le and Y. Chang, “Oil Price Shocks and Trade Imbalances,” Energy Economics, vol. 36,
issue C (2013), pp. 78–96.
9
D. K. Backus and M. J. Crucini, “Oil Prices and the Terms of Trade,” Journal of International
Economics, vol. 50, no. 1 (2000), pp. 85–213.
10
S. J. Davis and J. Haltiwanger, “Sectoral Job Creation and Destruction Responses to Oil Price
Changes,” Journal of Monetary Economics, vol. 48, no. 3 (2001), pp. 465–512.
44 THE JOURNAL OF ENERGY AND DEVELOPMENT
11
K. Lee and S. Ni, “On the Dynamic Effects of Oil Price Shocks: A Study Using Industry Level
Data,” Journal of Monetary Economics, vol. 49, no. 4 (2002), pp. 823–52.
12
L. Kilian, “The Economic Effects of Energy Price Shocks,” Journal of Economic Literature,
vol. 46, no. 4 (2008), pp. 871–909.
13
C. Bouchaour and H. Al-Zeaud, “Oil Price Distortion and Their Impact on Algerian Macro-
economics,” International Journal of Business and Management, vol. 7, no. 18 (2012), pp. 99–114.
14
L. Kilian, “A Comparison of the Effects of Exogenous Oil Supply Shocks on Output and
Inflation in the G7 Countries.”
15
K. Ito, “The Impact of Oil Price Volatility on Macroeconomic Activity in Russia,” Economic
Analysis Working Papers, vol. 9, no. 5 (2010), pp. 1–10, and C.-R. Fang and S.-Y. You, “The
Impact of Oil Price Shocks on the Large Emerging Countries’ Stock Prices: Evidence from China,
India, and Russia,” International Review of Economics and Finance, vol. 29, issue C (2014), pp.
330–38.
16
N. Cantore, A. Antimiani, and P. R. Anciaes, “Sweet and Sour Consequences for Devel-
oping Countries,” Overseas Development Institute Working Paper no. 355, London, 2012,
pp. 1–56.
17
C. Baumeister, G. Peersman, and I. Robays, “The Economic Consequences of Oil Shocks:
Differences across Countries and Time,” in Inflation in an Era of Relative Price Shocks, eds.
R. Fry, C. Jones, and C. Kent (Sydney: Reserve Bank of Australia, 2010), pp. 91–128.
18
O. Mendoza and D. Vera, “The Asymmetric Effects of Oil Shocks on an Oil-Exporting
Economy,” Cuadernos de Economı́a, vol. 47 (May 2010), pp. 3–13.
19
H. Mohammadi and M. R. Jahan-Parvar, op. cit.
20
M. E. Arouri, M. Bellalah, and D. K. Nguyen, “Further Evidence on the Responses of Stock
Prices in the GCC Countries to Oil Price Shocks,” International Journal of Business, vol. 16, no. 1
(2011), pp. 89–102.
21
S. Brown and M. Yücel, “Oil Prices and Economic Activity: A Question of Neutrality,”
Federal Reserve Bank of Dallas Economic and Financial Review, second quarter (2000), pp.
16–23.
22
E. Aleisa and S. Dibooglu, “Oil Prices, Terms of Trade Shocks, and Macroeconomic Fluc-
tuations in Saudi Arabia,” Contemporary Economic Policy, vol. 22, no. 1 (2002), pp. 50–62.
23
L. Kilian, “Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in
the Crude Oil Market,” American Economic Review, vol. 99, no. 3 (2009), pp. 1053–069.
24
L. Kilian and C. Park, op. cit.
25
L. Kilian and L. T. Lewis, “Does the Fed Respond to Oil Price Shocks?” Economic Journal,
vol. 121, no. 155 (2011), pp. 1047–072.
26
L. Kilian, R. Alessandro, and S. Nikola, “Oil Shocks and External Balances,” Journal of
International Economics, vol. 77, no. 2 (2009), pp. 181–94.
 OIL SHOCKS & SAUDI ARABIA 45
27
L. Kilian, “Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in
the Crude Oil Market.”
28
D. Dickey and W. Fuller, “Distribution of the Estimators for Autoregressive Time Series with
a Unit Root,” Journal of the American Statistical Association, vol. 74, no. 366 (June 1979),
pp. 427–31.
29
P. C. B. Phillips and P. Perron, “Testing for Unit Root in Time Series Regression,” Bio-
metrika, vol. 75, no. 2 (1988), pp. 335–46.
30
L. Kilian, “Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in
the Crude Oil Market;” L. Kilian and C. Park, op. cit.; and L. Kilian et al., op. cit.
31
L. Kilian and C. Park, op. cit.
32
L. Kilian, “Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in
the Crude Oil Market,” and L. Kilian et al., op. cit.
33
S. Goncalves and L. Kilian, “Bootstrapping Autoregressions with Conditional Hetero-
skedasticity of Unknown Form,” Journal of Econometrics, vol. 123, no. 1 (2004), pp. 89–120.
34
Saudi Arabia Monetary Agency (SAMA), Annual Statistics (Riyadh: SAMA, June 10, 2015).
35
H. Mohammadi and M. R. Jahan-Parvar, op. cit.
36
L. Kilian, “Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in
the Crude Oil Market.”
37
Ibid.; L. Kilian and C. Park, op. cit.; and L. Kilian et al., op. cit.