The effects of oil price shocks on the macroeconomy: economic growth and unemployment in Saudi Arabia

Abstract In contrast to the majority of studies which focus primarily on oil‐importing countries in describing the mechanism by which oil price shocks affect economic activities, this study focuses on oil‐exporting countries. Saudi Arabia is taken as a key example in considering two macroeconomic variables: economic growth and unemployment. This study examines changes in these variables in terms of the effects of two types of disturbances: demand and supply, following Blanchard and Quah’s ( American Economic Review 1989; 79: 655) approach. The findings of impulse response analysis and variance decomposition indicate that oil price shocks play a key role in the fluctuations in economic growth and unemployment in the Saudi economy.