ANALYSIS OF THE EFFECT OF THE EUROPEAN DEBT CRISIS ON THE SAUDI ARABIAN ECONOMY
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Dec 8, 2021
Abstract
This paper investigates the economic impact of the 2009 European debt crisis on Saudi Arabia’s real economy from 2004 Q2 to 2014 Q2 using a structural vector autoregressive model (SVAR). The results of the impulse response functions obtained from the aggregated data show that the shock to European imports from Saudi Arabia had a significant impact on the real effective exchange rate, inflation rate, and economic growth that lasted for three periods. Moreover, the variance decomposition analysis shows that Europe’s imports from Saudi Arabia explain approximately 20% of the variance of the Saudi real effective exchange rate and real economic growth, 10% of the interest rate variability, and only 5% of the inflation rate variance. The results of the individual country analysis show that the impact of shocks to imports from all European countries had an instantaneous impact, except for France and Spain, where the impact on the economic growth was significant in the second and sixth periods respectively. The results suggest that Saudi Arabian policymakers should continue the process of export diversification in order to reduce its dependence on this region.
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Keywords
European Debt CrisisReal EconomyStructural VARSaudi Arabia. JEL ClassificationB17C58G01G17
References
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Benlagha, N. (2020). Stock Market Dependence in Crisis Periods: Evidence from Oil Price Shocks and the Qatar Blockade. Research in International Business and Finance, 54, dOI: 10.1016/j.ribaf.2020.101285.
Bello, J. and Rodgers, T., (2016). Financial Contagion from US to African Frontier Markets During The 2007–2009 Global Financial Crisis. Handbook of frontier markets. In: Andrikopoulos, P., Gregoriou, G.N., Kallinterakis, V. (Eds.), The African, European and Asian Evidence. Academic Press, Amsterdam, 1, 93–114.
Berkmen, S.P., Gelos, G., Rennhack, R. and Walsh, J.P. (2012). The Global Financial Crisis: Explaining Cross-Country Differences in the Output Impact. Journal of International Money and Finance, 31 (1). 42-59.
Blecker. R. (2016). The US Economy since the Crisis: Slow Recovery and Secular Stagnation. European Journal of Economics and Economic Policies: Intervention. 13(2), 203–214.
Breitung, J., Brüggemann, R. and Lütkepohl, H. (2004). Structural Vector Autoregressive Modeling and Impulse Responses. Applied Time Series Econometrics.
Brutti, F. and Sauré, P. (2015). Transmission of Sovereign Risk in the Euro Crisis. Journal of International Economics, 9(7)2, 231-24. DOI: 10.1016/j.jinteco.2015.03.009.
Celık, S. (2012). The More Contagion Effect on Emerging Markets: The Evidence of DCC-GARCH Model. Economic Modelling. 29(5). 1946-1959. Doi. 10.1016/j.econmod.2012.06.011.
Caporin, M., Pelizzon, L., Ravazzolo, F. and Rigobon, R. (2018). Measuring Sovereign Contagion in Europe. Journal of Financial Stability, 34, 150-181, doi:10.1016/j.jfs.2017.12.004.
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Chava, S. and Purnanandam, A. (2011). The Effect of Banking Crisis on Bank-Dependent Borrowers. Journal of Financial Economics, 99(1), 116–135.
Claeys, P., Vasicek B. (2012).Measuring Sovereign Bond Spillover in Europe and the Impact of Rating News. IREA-Working paper, 2012, IR12/019.
Constancio, V. (2012) Contagion and the European Debt Crisis Public debt, Monetary Policy and Financial Stability. Financial Stability Review, 16, 109-121.
Dooley, M. and Hutchison, M. (2009). Transmission of the U.S. Subprime Crisis to Emerging Markets: Evidence on the Decoupling–Recoupling Hypothesis. Journal of International Money and Finance, 28(8), 1331-1349. DOI. 10.1016/j.jimonfin.2009.08.004.
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Fratzscher, M. (2002). Financial Market Integration in Europe: on the Effects of EMU on Stock Markets. International Journal of Finance & Economics, 7(3), 165-193.
Forbes, K. and M.D. Chinn. (2004). A Decomposition of Global Linkages in Financial Markets over Time. Review of Economics and Statistics 86 (3), 703–722.
Gabor, D. (2014). Learning from Japan: The European Central Bank and the European Sovereign Debt Crisis. Review of Political Economy, 26:2, 190-209.
Glick, R., and A.K. Rose, (1999). Contagion and Trade. Why Are Currency Crises Regional? Journal of International Money and Finance 18 (4), 603–617.
Goldstein, M. and Xie, D. (2009). The Impact of the Financial Crisis on Emerging Asia. Peterson Institute for International Economics Working Paper, 09-11. Doi: 10.2139/ssrn.1499875.
Ghulam, Y.and Doering, J. (2018). Spillover Effects among Financial Institutions within Germany and the United Kingdom. Research in International Business and Finance, 44, 49-63, DOI: 10.1016/j.ribaf.2017.03.004.
Kim, Y. and Lee, C. (2019). Sovereign Debt Crisis in a Monetary Union: Accounting for excessive debt, Housing Bubbles, and the Transmission of Crises. Economic Inquiry, 57(2). DOI: 10.1111/ecin.12745 1098-1119.
Kim, B., Kim, H. and Lee, B. (2015). Spillover effects of the U.S. financial crisis on financial markets in emerging Asian countries. International Review of Economics & Finance, 39, 192-210. Doi. 10.1016/j.iref.2015.04.005.
Kilian, L. (2009) Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market. American Economic Review 99, 1053-1069.
Kollmann, R., Pataracchia, B., Raciborski, R., Ratto, M., Roeger, W. and Vogel, L. (2016). The post-crisis slump in the Euro Area and the US: Evidence from an estimated three-region DSGE model. European Economic Review, 88, 21-41, DOI: 10.1016/j.euroecorev.2016.03.003.
Longstaff, F.A (2010). The subprime credit crisis and contagion in financial markets. Journal of Financial Economics, 97(3), 436-450. Doi. 10.1016/j.jfineco.2010.01.002.
Mollah, S., Quoreshi, Q. and Zafirov, G. (2016). Equity Market Contagion During Global Financial and Eurozone Crises: Evidence from a Dynamic Correlation Analysis. Journal of International Financial Markets, Institutions and Money, 41, 151-167. Doi: 10.1016/j.intfin.2015.12.010.
Park Y. C. and Song C.Y. (2001). Financial Contagion in the East Asian Crisis: With Special Reference to the Republic of Korea. In: Claessens S., Forbes K.J. (eds) International Financial Contagion, Springer, Boston, MA.
Sbracia, M., S. and Zaghini. (2013). The Role of the Banking System in the International Transmission of Shocks. The World Economy. 26(5). 727-754. Doi:10.1111/1467-9701.00544.
Shikimi, M. and Yamada, K., (2019). Trade and financial channels as the transmission mechanism of the financial crisis. International Review of Economics and Finance, DOI: 10.1016/j.iref.2019.04.008.
Neaime, S. Gaysset, I. and Badra. N. (2018). The Eurozone Debt Crisis: A structural VAR approach. Research in International Business and Finance, 43, 22-33, DOI: 10.1016/j.ribaf.2017.08.002.
Stracca, L. (2015). Our currency, your problem? The global effects of the euro debt crisis. European Economic Review. 74, 1-13. DOI: 10.1016/j.euroecorev.2014.10.009.
Verick, S. (2011). The Impact of the Global Financial Crisis on Labour Markets in OECD Countries: Why Youth and Other Vulnerable Groups Have Been Hit Hard. Islam I., Verick S. (eds) From the Great Recession to Labour Market Recovery, Palgrave Macmillan, London.
Amisano, G. and Giannini, C. (1997). From VAR Models to Structural VAR Models. Topics in Structural VAR Econometrics, (pp. 1-28). Springer, Berlin, Heidelberg.
Aizenman J., Jinjarak, Y., Lee, M. and Park. D. (2016). Developing Countries’ Financial Vulnerability to the Eurozone Crisis: An Event Study of Equity and Bond Markets. Journal of Economic Policy Reform. 19(1), 1-19. Doi:10.1080/17487870.2015.1018831.
Ayton, J. and Rao-Nicholson, R. (2018). Cross-Border Arbitrage and Acquirers’ Returns in the Eurozone Crisis. Journal of Economics and Business, 95, 87-102. doi:10.1016/j.jeconbus.2017.05.001.
Baig, T. and Goldfajn, I. (1999). Financial Market Contagion in the Asian Crisis. IMF Economic Review, 46. DOI. 10.2307/3867666.
Benlagha, N. (2020). Stock Market Dependence in Crisis Periods: Evidence from Oil Price Shocks and the Qatar Blockade. Research in International Business and Finance, 54, dOI: 10.1016/j.ribaf.2020.101285.
Bello, J. and Rodgers, T., (2016). Financial Contagion from US to African Frontier Markets During The 2007–2009 Global Financial Crisis. Handbook of frontier markets. In: Andrikopoulos, P., Gregoriou, G.N., Kallinterakis, V. (Eds.), The African, European and Asian Evidence. Academic Press, Amsterdam, 1, 93–114.
Berkmen, S.P., Gelos, G., Rennhack, R. and Walsh, J.P. (2012). The Global Financial Crisis: Explaining Cross-Country Differences in the Output Impact. Journal of International Money and Finance, 31 (1). 42-59.
Blecker. R. (2016). The US Economy since the Crisis: Slow Recovery and Secular Stagnation. European Journal of Economics and Economic Policies: Intervention. 13(2), 203–214.
Breitung, J., Brüggemann, R. and Lütkepohl, H. (2004). Structural Vector Autoregressive Modeling and Impulse Responses. Applied Time Series Econometrics.
Brutti, F. and Sauré, P. (2015). Transmission of Sovereign Risk in the Euro Crisis. Journal of International Economics, 9(7)2, 231-24. DOI: 10.1016/j.jinteco.2015.03.009.
Celık, S. (2012). The More Contagion Effect on Emerging Markets: The Evidence of DCC-GARCH Model. Economic Modelling. 29(5). 1946-1959. Doi. 10.1016/j.econmod.2012.06.011.
Caporin, M., Pelizzon, L., Ravazzolo, F. and Rigobon, R. (2018). Measuring Sovereign Contagion in Europe. Journal of Financial Stability, 34, 150-181, doi:10.1016/j.jfs.2017.12.004.
Cetorelli, N. and Goldberg, L.S. (2011). Global Banks and International Shock Transmission: Evidence from the Crisis IMF. Economic Review, 59, pp. 41-76.
Charfeddine, L. and Barkat, K. (2020). Short- and long-run asymmetric effect of oil prices and oil and gas revenues on the real GDP and economic diversification in oil-dependent economy, Energy Economics, Vol. 86, 104680.
Chava, S. and Purnanandam, A. (2011). The Effect of Banking Crisis on Bank-Dependent Borrowers. Journal of Financial Economics, 99(1), 116–135.
Claeys, P., Vasicek B. (2012).Measuring Sovereign Bond Spillover in Europe and the Impact of Rating News. IREA-Working paper, 2012, IR12/019.
Constancio, V. (2012) Contagion and the European Debt Crisis Public debt, Monetary Policy and Financial Stability. Financial Stability Review, 16, 109-121.
Dooley, M. and Hutchison, M. (2009). Transmission of the U.S. Subprime Crisis to Emerging Markets: Evidence on the Decoupling–Recoupling Hypothesis. Journal of International Money and Finance, 28(8), 1331-1349. DOI. 10.1016/j.jimonfin.2009.08.004.
Dua, P. and Tuteja, D. (2017). Impact of Eurozone sovereign Debt Crisis on China and India. The Singapore Economic Review, 62(05), 1137–1164. DOI: 10.1142/s021759081550099x.
Dungey, M., Khan, F. and Raghavan, M. (2018). International Trade and the Transmission of Shocks: The Case of ASEAN-4 and NIE-4 Economies. Economic Modelling, 72, 109-121, DOI: 10.1016/j.econmod.2018.01.008.
Efthymios G. T., Konstantinos N. K. and Panayotis G. M. (2016) Bayesian GVAR with K-Endogenous Dominants and Input–Output Weights: Financial and Trade Channels in Crisis Transmission for BRICs. Journal of International Financial Markets, Institutions and Money, 42. 1-26. DOI: 10.1016/j.intfin.2016.01.001.
Frankel J. A. and Schmukler. S. L. (1997). Crisis, Contagion, and Country Funds: Effects on East Asia and Latin America. Pacific Basin Working Paper Series, Working Paper No. PB96-04.
Fratzscher, M. (2002). Financial Market Integration in Europe: on the Effects of EMU on Stock Markets. International Journal of Finance & Economics, 7(3), 165-193.
Forbes, K. and M.D. Chinn. (2004). A Decomposition of Global Linkages in Financial Markets over Time. Review of Economics and Statistics 86 (3), 703–722.
Gabor, D. (2014). Learning from Japan: The European Central Bank and the European Sovereign Debt Crisis. Review of Political Economy, 26:2, 190-209.
Glick, R., and A.K. Rose, (1999). Contagion and Trade. Why Are Currency Crises Regional? Journal of International Money and Finance 18 (4), 603–617.
Goldstein, M. and Xie, D. (2009). The Impact of the Financial Crisis on Emerging Asia. Peterson Institute for International Economics Working Paper, 09-11. Doi: 10.2139/ssrn.1499875.
Ghulam, Y.and Doering, J. (2018). Spillover Effects among Financial Institutions within Germany and the United Kingdom. Research in International Business and Finance, 44, 49-63, DOI: 10.1016/j.ribaf.2017.03.004.
Kim, Y. and Lee, C. (2019). Sovereign Debt Crisis in a Monetary Union: Accounting for excessive debt, Housing Bubbles, and the Transmission of Crises. Economic Inquiry, 57(2). DOI: 10.1111/ecin.12745 1098-1119.
Kim, B., Kim, H. and Lee, B. (2015). Spillover effects of the U.S. financial crisis on financial markets in emerging Asian countries. International Review of Economics & Finance, 39, 192-210. Doi. 10.1016/j.iref.2015.04.005.
Kilian, L. (2009) Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market. American Economic Review 99, 1053-1069.
Kollmann, R., Pataracchia, B., Raciborski, R., Ratto, M., Roeger, W. and Vogel, L. (2016). The post-crisis slump in the Euro Area and the US: Evidence from an estimated three-region DSGE model. European Economic Review, 88, 21-41, DOI: 10.1016/j.euroecorev.2016.03.003.
Longstaff, F.A (2010). The subprime credit crisis and contagion in financial markets. Journal of Financial Economics, 97(3), 436-450. Doi. 10.1016/j.jfineco.2010.01.002.
Mollah, S., Quoreshi, Q. and Zafirov, G. (2016). Equity Market Contagion During Global Financial and Eurozone Crises: Evidence from a Dynamic Correlation Analysis. Journal of International Financial Markets, Institutions and Money, 41, 151-167. Doi: 10.1016/j.intfin.2015.12.010.
Park Y. C. and Song C.Y. (2001). Financial Contagion in the East Asian Crisis: With Special Reference to the Republic of Korea. In: Claessens S., Forbes K.J. (eds) International Financial Contagion, Springer, Boston, MA.
Sbracia, M., S. and Zaghini. (2013). The Role of the Banking System in the International Transmission of Shocks. The World Economy. 26(5). 727-754. Doi:10.1111/1467-9701.00544.
Shikimi, M. and Yamada, K., (2019). Trade and financial channels as the transmission mechanism of the financial crisis. International Review of Economics and Finance, DOI: 10.1016/j.iref.2019.04.008.
Neaime, S. Gaysset, I. and Badra. N. (2018). The Eurozone Debt Crisis: A structural VAR approach. Research in International Business and Finance, 43, 22-33, DOI: 10.1016/j.ribaf.2017.08.002.
Stracca, L. (2015). Our currency, your problem? The global effects of the euro debt crisis. European Economic Review. 74, 1-13. DOI: 10.1016/j.euroecorev.2014.10.009.
Verick, S. (2011). The Impact of the Global Financial Crisis on Labour Markets in OECD Countries: Why Youth and Other Vulnerable Groups Have Been Hit Hard. Islam I., Verick S. (eds) From the Great Recession to Labour Market Recovery, Palgrave Macmillan, London.
How to Cite
Benlagha, Noureddine, and Lanouar Charfeddine. 2021. “ANALYSIS OF THE EFFECT OF THE EUROPEAN DEBT CRISIS ON THE SAUDI ARABIAN ECONOMY”. Studies in Business and Economics 24 (1). https://doi.org/10.29117/sbe.2021.0127.
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