Revisiting the Demand for Money in Saudi Arabia

This paper revisits the issue of the demand for money (in this case, M3) in the Kingdom of Saudi Arabia. Well-known standard analytical techniques were employed, including tests of the data for unit roots, cointegration relationships, and the use of error correction modeling to estimate income elasticities and the impact of interest rates on money demand. However, this paper differs from most in its attention to the data used in the analysis, specifically, the data for M3, which is the dependent variable. Two separate (but related) issues were addressed – the traditional way of measuring the money supply and its impact on the models using it, and the fact that monthly and annual money supply data prior to mid-1988 are still published using the Hijra fiscal year, since monetary statistics were not kept on a Gregorian basis. The problems that these issues cause are examined and revised M3 data series are tested. Addressing both of these problems is done by converting the Hijra-based data into a Gregorian basis and using the monthly average of M3 for the annual series, rather than the end of year data traditionally used. The use of the new series appears to result in better-fitting and more stable models. This paper recommends that future statistical research, particularly using pre-1988 data, use the revised data in place of the currently published series.