Factors influencing the money stock in Saudi Arabia: an empirical investigation

-Former Associate Professor, Department of Economics, College of Business and Economics, King Saud University, Al-Gasseem Branch, Buraidah **Assistant Professor, Department of Economics, College of Administrative Sciences, King Saud University, Riyadh, Saudi Arabia.This paper uses both cointegration analysis and forecasting analysis in an attempt to examine the main factors influencing the money supply process in Saudi Arabia over the 1984.07-1995.06 period. The empirical findings seem to suggest that the money multiplier in Saudi Arabia is the mirror image of the currency ratio. A common trend seems to be driving their long run behavior. For most of the time, movements in the currency ratio are to a larger extent equally associated with changes of both demand deposits and currency. Lately, money growth has been largely ascribed to monetary base growth. The forecasting exercise reveals that the basic model yields relatively higher forecasts for the multiplier.It also indicates that a reserve ratio shock would induce a larger negative effect on the money multiplier and then on to the money stock than a currency ratio shock. This finding may suggest that factors outside SAMA's control that are likely to influence the currency ratio do not greatly limit its ability to manage the money supply process. Thus, the monetarist contention that central banks are able to control the money stock is not that controversial in the Saudi monetary context