Estimating Optimal Inflation Rate in Saudi Arabia: Using Dynamic Threshold Regression Model

Soleman O. Alsabban, Sarah N. Alnuwaiser
2021 International Journal of Economics and Finance  
This study evaluates the relationship between inflation and the output gap in Saudi Arabia. Specifically, it determines a level of optimal inflation for the output gap given the changes in the economic cycle. The novelty of this study’s research question is linking optimal inflation with the non-oil output gap in Saudi Arabia by constructing a dynamic threshold regression model. The estimation is carried out by using a yearly time series from 1981 to 2019. The variables used in our model
more » ... re based on existing economic theories that have established a correlation between the GDP gap as the dependent variable and inflation, money supply, and total exports as explanatory variables. The results obtained in this study suggest the existence of a threshold level of inflation of which the turning point is located at 3 percent.
doi:10.5539/ijef.v13n3p40 fatcat:ax27pkgoljcs7fkozknyvomhle