Estimation and Analysis of the Output Gap for the Saudi Economy; Econometric Study (1970-2016)

Abstract

This study highlights the important role plays by the output gap as guidance to the policymakers and macroeconomic decisions. There are two aims for this paper: firstly, it measures and estimates the output gap and secondly, it identifies and analyses the determinants of the economic output gap for the Saudi Arabian economy over the period 1970-2017. This paper uses the HP filter and the new form of production function methods to measure the output gap as the production function method gives more accurate results in calculating the output gap by basing the GDP gap on the sum of production factors gaps. The Autoregressive Distributed Lag (ARDL) cointegration approach and bounds test was applied to determine the factors responsible for this output gap and the Error Correction Model indicated the convergence towards long-run equilibrium. The findings showed the existence of a positive and negative cointegration relationship in the long run between the output gap and its estimated determinants whereby the public sector investment, import expenditure, and higher secondary enrollment have a positive relationship, while the money supply and export earnings have a negative relationship.