Causal Relationships Between Financial and Economic Development in Gulf Countries

Öz

This paper examines the causal relationships between financial and economic aggregates in three Gulf countries, Bahrain, Kuwait, and Saudi Arabia, over the 64?quarterly period from 1973 to 1988.Patrick's causality patterns at different stages of economic development were also investigated by dividing the entire analysis period into the sub-periods of 1973?81, and 1982?88. Financial variables used were M1, M2 and the total bank credits. Exports in all the three countries plus government expenditures in Kuwait were employed as proxies to GDP.
Sims' causality model which is based on Granger's definition was utilized and the following general patterns were detected: For the entire analysis period causality ran from financial to economic variables in Kuwait, but from economic to financial variables in Bahrain. While no generalization was possible for Saudi Arabia for the first sub-period (l973?81), a supply-leading phenomenon was dominant in Bahrain and Saudi Arabia. In Kuwait the results were mixed. In the second sub-period (1982?88), the dominant relationship was demand following in all the three countries. These results were seen in conformity with the economic trends in these countries over the study period.