Abstract/Summary

This dissertation contributes to the monetary transmission literature by providing a comprehensive assessment of how monetary actions, under the pegged regime and within an oil-based economy, influence key macroeconomic variables in Saudi Arabia. The dissertation offers both theoretical insights and empirical evidence about how demand components respond to monetary actions and highlights the transmission mechanisms through which these effects are transmitted. Cumulatively, it enhances the understanding of monetary transmission and assesses the effectiveness of the current framework. The thesis starts with an introduction that establishes the overall setting for the thesis. Chapters 1, 2, and 3 can each be read as stand-alone papers; thus, each includes its own introduction, review of the literature, and employs different methodologies and data sets. Chapter one contributes to the exchange rate pass-through literature by providing a theoretical analysis, based on Campa and Goldberg [2005] but adapted to comply with the assumptions of the dominant currency paradigm (DCP) and pegged regime, of how changes in trading partners’ currencies against the dollar are transmitted to import prices, especially as prior studies indicate higher pass-through under pegged regimes than floating, (Parsley [2003], Barhoumi [2006], Akofio-Sowah [2009], Jin [2012]). Chapter two contributes to neoclassical investment analysis for commodity-based economies by examining the monetary transmission to investment decisions, taking into account the movements of real commodity prices. This chapter includes an analysis based on the dynamics of firms’ balance sheets, exploring not only the interest rate channel but also the broad credit channel, as discussed in Bernanke and Gertler [1995] and Mishkin [1996]. Chapter three enriches the existing literature on monetary transmission by analyzing the transmission mechanism into households’ consumption-saving decisions, particularly in the context of market and cultural constraints that limit the economic efficiency of financial saving channels. The chapter specifically examines the short-term response of private consumption to interest rate changes, with a focus on the role of the banking channel in this transmission process. To capture the short-term effects of unexpected monetary shocks, business cycle analysis is applied, providing a detailed understanding of short-term consumption dynamics. Finally, the conclusion section of the thesis provides final remarks and offers suggestions for future research directions.