Executive Summary
This research, most importantly, gets into details intended to enhance appreciation of the monetary policy transmission mechanism in Saudi Arabia and its impact on key economic indicators. The background of the monetary policy in Saudi Arabia starts with the paper, and it is then stressed that the monetary policy transmission mechanisms are essential to sustain economic stability and facilitate growth. The objectives of the research are to inform about the longer-term relationships as well as the short-term causality effect of monetary variables, which are explored employing high-end econometric techniques on the empirical data. The literature review summarizes the results of the investigations that were obtained to analyze the effects of the monetary policy transmission mechanisms portfolio using Cointegration and Vector error correction models to understand the behaviour of economic variables. Based on this theoretical framework, the study hinders itself by using robust methodology, such as data gathering, stationarity testing, cointegration analysis, and the estimation of the VECM model to deal with the empirical data. The study, by way of partial correlations, discloses the mutual and causal relationship among different monetary aggregates that points to the bidirectional causality and endogeneity of the money stock of the Saudi Arabian Economy. Through evaluation of the findings, the study highlights the effectiveness of the tool of monetary policy in tackling the business cycle along with the imperfections attributable to the tool, like data scarcity and special context. The study reveals important points that could give a clue as to how the policymakers should respond using a holistic method, which entails looking at the complex ways in which different variables interact. Even though this research provides significant contributions, further studies are still required to develop data collection that might enable the exploration of the features of technological progress as well as regulatory changes on monetary policy transmission. Constantly varied research activities are unquestionably crucial to providing input for evidence-based policy-making, the ultimate aim of which is to promote economic stability and growth either in Saudi Arabia or elsewhere.
1.0 Introduction
1.1 Background of Monetary Policy in Saudi Arabia
In this respect monetary policy of Saudi Arabia was radically changed by the year 1952 when SAMA was established, the Saudi Arabian Monetary Authority. At the very first, the main objective of monetary policy was to assure the stability of the value of Saudi Riyal in foreign exchange markets (King, 2012). Nevertheless, the earlier role of the SAMA, as discussed above, was small, but with time, the ambit of its mission was extended to cover the overall goal of ensuring price stability, sustainable economic growth, and financial sector stability. Along with the evolution of the kingdom’s economy and the various sectors that resulted, the tools and mechanisms of SAMA (Saudi Arabian Monetary Agency) were highly developed and dynamically changed in alignment with the objectives of the authority. Exploring the scope of historical changes and the development of monetary policy in Saudi Arabia suggests many important ideas around the current framework and problems facing policymakers.
1.2 Importance of Understanding Monetary Policy Transmission Mechanism
The channel of monetary policy scheme deals with the process by which the economy is affected by specific policy instruments such as interest rates and the required reserve ratio. The transmission mechanism of such tools affects real economic variables such as output, employment, and prices. The financial condition in Saudi Arabia is impacted by both domestic and global factors, same as there is a need to comprehend the effects of monetary policy decisions is truly vital in this case (McLeay et al., 2014). By understanding the transmission mechanism thoroughly, the policymakers will be able to see the ripple effects of their choices in the larger depths of the economy way before the impact, couple the appropriate policy measures with the input, and achieve their goals purposefully. Thus, studying the link between monetary policy and the economy in Saudi Arabia is important for policymakers, economists, and market participants to ensure the country’s economy firms up and creates room for prosperity.
1.3 Research Objective and Scope
The main aim of this research is to deliver a detailed study of the role of the monetary policy transmission channel in Saudi Arabia. It is carrying out the adjustment analysis of monetary policy instruments as every monetary variable is affected by the kingdom’s economic system. Analyzing the conduits through which monetary policy mechanisms are reflected, the article targets shedding light on the role and impact of monetary policy actions on the conventional indicators of the economy, namely output, inflation, and exchange rates.
1.4 Statement of Purpose or Problematics of the Paper
This paper particularly tries to highlight the topical issues regarding monetary policy in Saudi Arabia. The first lever employed is to aid our appreciation of the economic policy transmission mechanism in the kingdom’s special environment. Historically, Saudi Arabia’s economy has been characterized by some peculiarities and unique policy environments; these factors make it necessary to figure out the mechanisms through which monetary policy decisions are transmitted and the effectiveness of these decisions in bringing about desirable economic developments. Next, the essay strives to evaluate the efficiency of monetary policies and Strategies used by the Saudi Arabian Monetary Authority (SAMA). By analyzing the transmission mechanism, the paper considers how properly the monetary policy actions solve the economic objectives of the country, like price stability management, economic growth, and complimenting exchange rates. The last part of the plan is to see which policies are derived from the analysis of the mechanism of transmission into the economy. The main findings obtained as a result of the study of this case are expected to be helpful advice for the policymakers of Saudi Arabia that would enable them to make better monetary policy interventions. Through a critical analysis of the pros and cons that make up the current economic policy, this paper intends to fill in the gap in the discussion on the potential areas of improvement in the monetary policy effectiveness of Saudi Arabia.
1.5 Main Subjects/Topics Introduction
This report combines different main factors and issues that provide a foundation for analyzing the monetary policy in Saudi Arabia. The introduction will look at the economic policy framework and institutional straightforward of the same kingdom, paying attention to salient features and recent modifications. The foundation of institutional infrastructure should be relevant for comprehending the intricacies of monetary policy transmission mechanisms (Nayan et al., 2013). In the next place, the paper is going to analyze the monetary policy transmission mechanism in all its details, with the channels of the impact of monetary policy instruments on the economy investigated. Through these channels – the interest rate, credit, exchange rate, and other channels – take place in the transmission process of monetary policy. By doing such an analysis, one can get an idea of how the monetary policy affects economic activity not only in general terms but also at the level of sectors of the economy.
The report further writes about the empirical evidence of the monetary policy transmission mechanism in Saudi Arabia. It applies econometric techniques and statistical analysis to establish the relationship between the money policy instruments and main macroeconomic indicators. Through the application of empirical findings, this paper will endeavour to corroborate theoretical perspectives and will proffer reasons in support of its analysis of monetary policy effectiveness (Lavoie, 2005). Finally, the research is brought to the political context, and directions are given to improve the policy procedure in the case of Saudi Arabia. The paper will be formed out of a combination of theoretical insights, empirical evidence as well as policy implications. The main theme is to offer advice that will help to make better policies and discussions on how to improve the results of the monetary policy.
2.0 Literature Review
2.1 Overview of Monetary Policy Transmission Mechanism
The transmission mechanism of monetary policy is one of those critical elements of theory and practice, which explains in detail how changes in central bank instruments pass through the economic system and affect macroeconomic variables, including output, inflation, and employment. As for what it takes for policymakers to understand transmission channels completely, it is the same for economists and financiers. In this regard, the channel for interest rate is the crucial transmission channel, which, although complex, is a vital tool in the arsenal of monetary policy. This measure works by varying short-term interest rates, affecting companies’ investment, consumer behaviour, and lending costs. The interest rate channel is the key transmission channel discussed in the works of Bernanke and Blinder (1988) and Bernanke and Gertler (1995). Even though it is based on changes in credit costs, the channel evaluates the effect of the nominal interest rate on the economy. Economic channel, another approach to monetary policy transmission, is to consider the role of financial intermediaries or the credit channel that shapes the monetary policy shocks to the economy as a whole. Central banks’ actions that involve raising or decreasing interest rates can directly respond to credit requests from households and business organizations. Lopreite (2012) studies detailed how daily policy operates through the credit channel. The dynamic behaviour of the money multiplier and its effects on economic policy effectiveness was investigated through this research.
In addition, transaction or exchange rate channels have a lower relevance in the case of currency markets such as Saudi Arabia (which has a fixed exchange rate system). Still, they are a valid component within the general context of transmission mechanism theory. Volatility in exchange rates may impact competitiveness, foreign trade, and inflationary pressures, eventually adjusting consumers’ consumption and price movements. Borio and Disyatat (2009) brought their intellectual efforts to the specific subject of unconventional monetary policies which affect foreign exchange rates. They clearly illustrated the transmission mechanisms between these two phenomena, which broadened our discussion. Also, the expectation channel is a vital channel through which agents’ forward-looking behaviour is affected, and thus, that leads to the formatting of the economic outcomes. Anything from adjusting the signals to changing the policy communication can shape the expectations amid future interest rate and inflation scenarios. Such expectations are bound to have a bearing on the present economic decisions. Chai (2017) has been looking for international cases of various monetary policy regimes (again and again), and, as a result, she is helping us to understand how managing expectations is so precious that all we need to do is manipulate them to make the policy more effective.
King’s (2012) speech emphasizes the significant contribution of monetary policy towards stabilizing the economy and fostering its growth and specifies the need to understand the transmission mechanism in the process of policy-making. McLeay et al. (2014) give us the depth of what modern money creation is about. They show us how the role of commercial banks has been omitted in the creation of money and the traditional views of central bank control of this process. Endogenous money supply, as described by Nayan et al. (2013), contains empirical data demonstrating that the quantity of money circulating is solidly based upon economic factors, such as bank activity and aggregate demand, not being something that is apprehended without the inputs of other economic factors. According to Lavoie (2005), the monetary base has endogeneity in the monetary systems of Canada and America, and it implies the possible implications of asset-based monetary policies for economic stability and the linkages between monetary policy and financial markets. Lopreite (2012) studies the Euro Area empirically and draws evidence to attest to the notion of endogenous money, which recognizes the role of bank lending and economic conditions in money aggregates. This points out the relevance of policymakers who are doing their job well and that they need to set policies which only consider external factors. Palley (2015) sets a solid theoretical foundation for money creation driven from within the economy, which is very relevant for economic policy and macroeconomic analysis. Endogenous money theory can be integrated into economic models by policymakers so that robust economic stability can be achieved by designing advanced and more effective policy responses that take into account the endogenous nature of the money supply. Ultimately, these treaties provide grounds for a multiple understanding of the role and the relevance of the monetary channel through which the policies are prioritized and implemented, which takes into account internal factors.
2.2 Previous Studies on Monetary Policy in Saudi Arabia
Studies involving the newly adopted monetary policy transmission mechanisms in Saudi Arabia have been mainly aimed at understanding how these mechanisms function in the country’s specialized economic surroundings. Jakab and Kumhof (2015) suggest there are specific challenges and dynamics of emerging economies, as well as the specificity of Saudi Arabia in managing money supply, which their case offers valuable insights. The research of Hacker and Hatemi (2006), which focused on identifying output and inflation stability and the potential contribution of monetary policy to economic outcomes in Saudi Arabia, investigates. Although the mentioned studies offered some crucial achievements in the field, the literature still needs to be full of misses regarding the Channels of Transmission in the case of Saudi Arabia under the Monetary Policy.
2.3 Identified Gaps in Literature
The establishment factor of monetary policy transmission within Saudi Arabia is one of the essential elements of the literature that currently needs to be improved. Slowly but firmly, debt financing by banks can be reckoned as an integral ingredient of financing investments and consuming activities in the country. However, prior research has mainly focused on monetary transmission mechanisms through an interest rate channel, missing the subtleties of conducting financial intermediation in the country’s economic system. A sole focus on the oil market leaves no room for the issue of the exchange rate channel. Given Saudi’s unique position, their currency is fixed. As exchange rate adjustment is unavailable, theories of alternative transmission mechanisms are indispensable for broadening the understanding that monetary policy effectiveness prevails in the country and identifying possible new policy directions.
2.4 Significance of the Chosen Issue
The drawbacks and the availability of evidence in the context of the monetary transmission mechanism in Saudi Arabia should be checked; this type of analysis has valuable implications for monetary policymakers, researchers, and market participants. This research initiative aims to provide factual evidence about how monetary policy actions manifest in economic results and gives policymakers the needed wisdom to react when financial instability occurs. This research contributes to building the available knowledge on monetary issues and policy-making.
3.0 Theoretical Framework
3.1 Conceptual Framework of Monetary Policy Transmission
The theory of monetary policy transmission implies the essence of mechanisms through which the economic policy is being altered to impact the critical macro variables, such as the price level and the real GDP. The basis of this framework is the disclosure of the complicated scheme in which the policy adjustments in the financial instruments, such as interest rates and reserve requirements, diffuse throughout the economy and influence the aggregate demand, thereby moderating inflation and economic expansion levels. The channel of transmission is the recognition of several channels through which the policy response is transferred (Granger, 1969). They run as the corridors for news of these policy-driven changes to traverse through the different economic sectors, eventually impacting positively on the entire macroeconomic scenario. The transmission channels are fourfold: The interest-rate channel, the credit channel, the exchange-rate channel, and the expectations channel, each implying different behaviour of economic agents and the inner dynamics of the markets.
3.2 Channels of Concrete Action of Monetary Policy
The most commonly discussed transmission channel by which interest rates convey monetary policies is to adjust short-term interest rates to affect the decision of whether to invest, where to spend, and the cost of borrowing. Changes in effective interest policy, such as the central bank’s rate, impact the general level of the market interest rates, leading to readjusting economic credit activities. Understanding the influence of financial intermediaries, like banks, comes within the credit channel that supplements the interest rate method of monetary policy by adding to the channels through which monetary policy is transmitted. Changes in interest rates and bank behaviour can help determine lending preferences and credit qualification criteria for household and business borrowers (Goodhart, 2000). This focus points out the role of financial institutions in augmenting or softening the similarity of monetary policy to actual economic activity. The exchange rate channel, which is relatively less relevant to economies with band substitution policies like the Kingdom of Saudi Arabia, still carries a significant niche in the whole monetary policy transmission scheme. Transfers in exchange rates may behave in terms of rivalry specifics, terms of trade, and deflationary pressures, which affect aggregate demand and the economy in general. Lastly, the expectations channel draws attention to the impact of expectations about prices in the coming period, which eventually brings about the mentioned economic outcomes. Conveys of monetary policy signals and communications are subject to changes and determine agents’ perceptions of future interest rates and price stability, which equally influence market participants’ decisions and behaviour.
3.3 Correlation of The Saudi Economy
The monetary policy transmission channels play a critical role in the Saudi Arabian economy so that the policymakers, the economists and the investors become aware of them. Moreover, the dependence of the oil economy on foreign earnings from oil prices and the financial condition of the oil sector may be affected by fluctuations in global oil prices, so it is essential to implement an efficient monetary policy to ensure that the economy can happily co-exist with such volatility. The financial policy transmission conceptual framework presents us with a helpful explanation of how a shift in monetary policy instruments finds expression in the fluctuations of essential economic variables in Saudi Arabia (Goodhart, 2000). By clarifying the pathways where monetary policy impulses are transferred, policymakers can superbly predict the effects of their interventions and thus assemble adequate reactions effectively to ensure financial stability and economic prosperity in our kingdom.
4.0 Methodology
4.1 Data Collection and Source
The methodology part of the study describes how the approach is designed to analyze the impact of monetary policy variables on critical economic usefulness in Saudi Arabia. At the centre of this approach is collecting and using authentic figures and data from recognized experts. Monetary aggregate and interest rate data and other macroeconomic variables are collected during this study from the official publications of (SAMA) the Monetary Authority of Saudi Arabia, and the Central Bank of the Kingdom of Saudi Arabia. Moreover, in addition to primary data from institutions such as the International Monetary Fund (IMF), World Bank or other international organizations, supplementary data may be available to provide context and comparative analysis. Apart from the fact that the use of reliable and comprehensive data sources guarantees the quality of empirical analysis, it is also the data quality that is employed
4.2 Vector Autoregressive model with cointegration (VAR-COIN)
The Vector Error Correction Model will be a major tool of our study and other analytical frameworks for us to examine the transmission of monetary policy in Saudi Arabia. The VECM, as a popular and widespread econometric method, aims to describe long-term equilibrium relationships and short-run dynamic interactions among a group of variables affected by time (Bernanke & Gertler, 1995). The context of the study “Long-Run and Short-Run Interactions between Monetary Policy and Economics Indicators” mainly includes the VECM to analyze not only the long and short-run interactions between monetary policy variables, including money supply and interest rates, and key macroeconomic indicators, such as inflation, economic growth, and unemployment (Chai & Hahn, 2018). By including deviation terms, the VECM models the adjustment process that brings the economy back to long-run equilibrium, following deviation from equilibrium relations.
4.3 Model Specification
The model specification determines the structural link structure that will be applied and the parameters to be used in the VECM. This framework shows the model in terms of regression variables and lag dynamics of that output. Exogenous variables may arrive, and the exact number depends on the context. The monetary policy transmission process in the model specification equilibrium is given through the needed monetary aggregate equations, interest rates, and related variables to explain the dynamics. By introducing lagged variables in the model, we see that the monetary policy linked to economic behaviors proceeds through lagged effects and feedback loops (Lavoie, 2005). Predetermining the endogenous factors using, e.g., oil prices or an external disturbance, will allow us to see how these factors impact the transmitting mechanism.
4.4 Empirical Strategy
The empirical technique used in this study is critical to the amount of precision the estimated relationships in the Vehicle Error Correction Model (VECM) can be followed within the VECM principles. It starts with an elaborate and precise data set cleaning process, which, among other things, includes debiasing noisy data to defend it from parasitizing econometric analysis. It is carried out through the investigation of variance, consistency of data trends, and whether data can have a mean or difference of zero at the autocorrelated unit root test dataProcesseses like detrending, for example, could be applied to eliminate stationarity oe no structural break problem and he; hence, the model will be reliable for further use. The estimation is done with the aid of robust econometric methods to estimate the VECM parameters, such as the Johansen cointegration or the Maximum Likelihood method. Estimation of these techniques is the key to deriving these essential parameters, which include error correction coefficients and diagnostic test statistics (Palley, 2015). In addition to that, such parameters make a great contribution to understanding the complex linkages among monetary variables, their behavioral changes, and the gravity of the shocks hitting the entire system. Following that, a diagnostic test will be used to see how well the VECM is working and how people perceive it. This is done by conducting the model’s technique assessment, assessing the goodness of fit together with its stability and reliability. Imprecise tests like cointegration test, autocorrelation test, heteroscedasticity test, and structural breaks test are used as diagnostic tools to detect problems. Based on the output of the diagnostic tools, any incorrectness identified in the model’s execution will be amended, and any errors in the subsequent analysis will be avoided. When the VECM is obtained and diagnosed, the empirical findings are summed up, and every kind of interpretation is given (Granger, 1969). This is apparent in the measurement of the coefficients’ estimation, hypothesis testing, and understanding of the economic results’ significance level implication. This paper delineates the empirical consequences of various econometric modelling techniques, where VECM parameters are exploited to discuss monetary policy effectiveness, financial stability, and policy implications. According to the observations taken, the knowledge acquired on the signaling process mechanism helps to develop more awareness of the policy formulation and implementation processes.
5.0 Empirical Analysis
5.1 Data Description and Preprocessing
The study begins with an expository account of the data set that is called upon in the analysis. The data set from which these values are derived includes basic monetary policy variables, among which there are broad money aggregates (M1, M2). Then, interest rates (policy rate, lending rates) and macroeconomic indicators such as inflation, GDP growth, and unemployment rates are included. These stats are mostly drawn from the liquidity database of the SAMA, Saudi Arabian Monetary Authority, the premier source of the economic figures in the region, guaranteeing the information and figures are reliable and accurate. The first phase of data processing is preprocessing, where the quality improvement and evaluation for data analysis depend. First of all, the data set is subjected to an extensive review to look for missing data, as well as outliers and data inconsistencies (Goodhart, 2000). Data imputation methods may be used to postpone missing values of observations, which, in turn, helps preserve the temporal continuity of the time series data. Moreover, the models depend on outlier detection techniques to correct or exclude unusual data points that seem incorrect for the purpose. Another result that may also affect modeling outcomes is the nonstationary of time series data. To deal with non-stationarity in time series data, statistical tests like Dickey-Fuller (ADF) or the Phillips-Perron (PP) tests are often (frequently) performed to assess the stationary nature of variables. Those variables displaying non-stationary characteristics, either in an irregular trend or in the form of seasonal fluctuations, may be subject to more complicated modifications, such as first differencing or logarithmic transformation, in their quest to become stationary.
5.2 Stationarity Testing
Beyond Calibration, researchers must consider employing stationarity tests and trended drift tests that would guard against any trends or seasonal patterns that would render the data unsuitable for econometric analysis. The APF and PPP tests function as the basic techniques for rejecting the non-stationarity in the time-series procedures with the null of p= non-stationarity. With the null hypothesis implying non-stationarity, these tests measure whether a variable includes a unit root, with zero values indicating a variable that has no root being non-stationary. Under certain situations, some non-stationary variables may require transformation. Hence, they become suitable for the removal of instability and enable their use in the next stage of econometric studies, including cointegration tests and vector error-correction models.
5.3 Cointegration Analysis
The cointegration examination, which is a technique used for defining the basic relationships between non-stationary variables, is especially valuable in identifying a stable equity relationship among variables that have both individual trends. Cointegration analysis, empirically carried out in a VAR environment with the help of the Johansen test, is an important approach to investigate the compatibility between multivariate time series (Lopreite, 2012). This is one way to find out the co-integrating relationships and to make available the coefficients for each cointegration, which we can further exploit to retain the equilibrium between monetary policy variables and the economic figures. Determining the direct and indirect effects and also the time lags is why policymakers need to think of effective policy measures and understand the long-term impact as well. With honest destination connections, policymakers can outline policies and programs which inherently facilitate the enhancement of economic opportunities and financial stability.
5.4 VECM Estimation
The Vector Error Correction Model (VECM) is used to measure dynamic interactions between variables, and the basic measuring tool for evaluating the model is the error correction mechanism. It depicts both short deviations to the balance point, in addition to the change process towards long-run equilibrium following disturbing shocks of the system. As for the estimation techniques, they include maximum likelihood estimation or OLS (ordinary least squares), among others, which are frequently used for VECM parameter estimation. Such data as the error correction coefficients and lags provide very important information on the speed of reaction to disturbance and the direction of multiple equilibria convergence (Almutair, 2015). Getting hold of these movements is pivotal for determining the success of monetary policy in pursuing the policy goals and, above all, in the preservation of macroeconomic stability.
5.5 Interpretation of Results
Reading results intersection is a holistic establishing of presumed good enough, checks on hypothesis, and signifies economic impact. Coefficients that correspond with the parameters of the policies help us better interpret how inflation and employment are affected by these policies. The effects of monetary policy shocks are dynamically estimated by impulse response analysis and forecast error variance decomposition (FEVD) techniques (Lopreite, 2012). The presented methods are tools that help authorities identify the channels through which changes in monetary policy are transmitted to key economic variables. As a result, policymakers will make the right decisions based on them in their attempts to achieve economic ends.
6.0 Findings and Discussion
The corresponding knowledge acquired in the process of the findings is based on the analysis. It is, therefore, imperative for the effectiveness of the monetary policy and the economy in general. This section will summarize the conclusions about the long-run associations between economic variables, cause-effect in the short term and dynamics, and the policy effectiveness as a result of this study. It will conclude with the recommendations for the policy based on the study’s conclusions.
6.1 Long-Run Relationships among Monetary Variables
We observe that long-run connections among monetary statistics are quite significant, hinting that monetary components attain stable relations throughout the equilibrium interval. Particularly, the research indicates that the bank loans, denoted by BL, and the demand deposits, denoted by DD, are a cause in the long run, meaning that whose movements have a persistent influence on the overall money supply (MS). The latter phenomenon corroborates the endogenous money supply hypothesis, which asserts that the aggregate supply of money is caused by the process of credit creation and the demand for money, not by the action of the central bank that only supplies some fraction of the total money stock, exogenously determined (Palley, 2015). However, such sort of examinations also reveal a two-way influence, which is very common in this connection as the result of the interdependence of the financial system. For instance, the analysis is made concerning the long-run relationship between BL and another monetary aggregate (e.g., time deposits or savings deposits) that prove factors that are “long enough to generate an effect of spillover” among them over the long-term period. In other words, considering a wide scope of monetary variables is critical to fully understanding the transmission mechanism of economic policy and, accordingly, designing effective policy responses to macroeconomic shocks.
6.2 Short-Run Causality and Dynamics
Short-run causality and short-term real-time interactions among monetary variables are studied alongside setting long-run stationary relationships. The results confirm, though, that some factors tend to operate in a unidirectional method in the time above length. In contrast, others react in a complex fashion, for instance, exhibiting a bi-directional causality. As an example, the study reveals immediate causality leading from specifically selected monetary aggregates (such as M1 or M2) to the general money supply, which means changes in these variables (amount and names) prompt an alteration in the overall money supply (Palley, 2015). In addition, a close review of the short-run action uncovers its beneficial relationships and adjustments that take place in response to monetary shocks. As an example, new regulations on banks’ lending or sizing deposits may drive quick modifications in liquidity conditions. Values of credit in the economy will, therefore, be reduced. Moreover, the changing dynamics of the medium-term are prerequisites for high-frequency monitoring and assessing the fast corrections of monetary policy through recent statistics.
6.3 Implications for Monetary Policy Effectiveness
The results have substantial implications for the success of monetary policy in the Kingdom of Saudi Arabia and, as a consequence, its ability to achieve macroeconomic goals (price stability, high employment, and the cementing of sustainable economic growth). Firstly, the establishment of long-term relationships among various monetary variables indicates that policy actions (e.g., the reduction of credit supply or liquidity) will, in the long run, strongly affect the overall money supply and business conditions in an economy. Secondly, short-run causality and dynamics analyses are important in that they identify the constraints that policymakers have in meeting short-term mismatches in liquidity or imbalances in the financial system, which are caused by the assets and liabilities of the economic system (Chai, 2017). The fact that both types of causality are present and there are a lot of feedback effects is when we need to take proactive and flexible monetary policy into account, which can react to different situations in the economy and in financial markets.
6.4 Policy Recommendations
Based on the outputs, some policy recommendations come to light that allow the country to achieve high policy effectiveness. To begin with, decision-makers must embrace an all-encompassing mannerism with the formulation of monetary policies that incorporate the relationships between the various monetary aggregates and their impact on macroeconomic stability. As a result, the given approach contains the concatenation of conclusions drawn from different sources, including the long-term relationship dynamics and short-term effect changes in the policy-making process. Another point is that improved coordination among entities in charge of monetary policy and other macroeconomic instruments, like fiscal policy and the financial industry, is necessary (Hacker & Hatemi, 2006). Coherent coordination between the central bank, the government, and regulatory agencies can handle structural imbalance in the economic system and minimize systematic risks; therefore, it is ultimately helpful for the economy to respond to dynamic outside events. Besides, policymakers should point out that strengthening the transmission mechanism of monetary policy and allocating credit in an economically efficient way are some of the most noteworthy far-reaching goals, including building a financial market and making infrastructure investments. The authorities can contribute to tranquility by ensuring more transparency, competition, and innovation in the economic field, which will then render the channels for monetary policy transmission smooth and the economy to maintain durable growth.
7.0 Conclusion
To summarize, the results of this research provide us with valuable insight into the monetary policy transmission mechanisms in Saudi Arabia, which show how both the long-term relationships and the short-term effects of causality occur. The results, therefore, show an obvious mutual causality across different monetary aggregates that are conspicuous with the endogenous nature of economic supply and interdependencies on financial variables. This analysis attained empirical data by applying sophisticated econometric methods. The study reveals the efficiency and weaknesses of monetary policy as a tool for tackling economic cycles and liquidity problems. Such evidence has shown that policymakers need a holistic approach while dealing with monetary policy formulations; the policy should have an insight into the common picture that is determined by the dynamics of the variables and make policy instruments in line with it. Nevertheless, despite its advantages, the report is limited by certain factors, for example, data restrictions and economic narrowness; this can affect the study’s applicability in case the conditions have changed. Besides, it could be achieved by analyzing more specific data and examining the international experience of countries’ revisions to enhance the validity of the results. Moreover, regarding the effects of technological advancements and regulation modifications on monetary policy transmission, insights on these topics could be powerful tools for decision-makers who face an ever-increasingly complex financial environment. Thus, this study underscores how the research agenda towards elucidating monetary policy transmission mechanisms fully is of great importance to create evidence-based decisions on policies that lead to economic stability and growth not only in Saudi Arabia but the entire world.
8.0 Reference
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