Short- and long-run effects of remittance outflow shocks on the Saudi Arabian economy

This paper investigates the short- and long-run relationship between remittance outflows and the macroeconomic aggregates including non-oil GDP, investment, and inflation in Saudi Arabia for the period 1970-2014. Using a common trends model, the macroeconomic effects of remittances are decomposed into transitory (short-run effect) and permanent (long-run effect) components. The paper finds evidence of one cointegrating vector and the common trends model is identified to three permanent shocks, interpreted as one real external shock (remittance shock), one domestic real shock (non-oil GDP shock) and one domestic nominal shock (the inflation shock) and one transitory shock identified as investment shock. The impulse response functions show that the remittances shocks have short-run negative effects on non-oil GDP and negative long-run effects on inflation. Regarding to the effects of remittances on investment, the results show that there has been a shorter positive response of investment to remittance shocks, while in the long run, the remittances affect investment negatively. Results demonstrate that more incentives are required to overcome the negative effects of remittances outflows on non-oil GDP, inflation and investment Thus, increasing the propensity to save and invest in Saudi Arabia, by foreign workers, is a pressing concern to consider.