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Abstract:
This paper empirically investigates the short and long-run relationship between private investment, public investment, growth in output, credit available, interest rate, and budget deficit in Saudi Arabia during the period 1970-2015. The objective of the paper is to determine whether there is a stable long-run relationship. The study employs Johansen (1990) multivariate co integration approach for checking the existence of long-run integration among the variables along with Vector Error Correction Model (VECM) to examine the short-run dynamics. Further, Granger Causality test is carried out. The results indicate the presence of stable long-term relationships and show that private investment is positively influenced by growth in output (accelerator effect), public investment, and availability of credit. Interest rate and budget deficit are negatively related to private investment. The short-run dynamics results reveal that public investment crowds out private investment in the short run. Unidirectional Granger causality is reported from government investment and growth in output to private investment in two period lag. There is also unidirectional causality from interest rate to private investment.
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