Abstract

This paper assesses the stance of actual monetary policy in Saudi Arabia relative to a benchmark Taylor-rule calibration of short-term interest rates. In addition, the reaction function of monetary policy in Saudi Arabia is estimated empirically to understand the behavior of interest rates using an augmented Taylor-rule equation. The results indicates that the Saudi monetary authorities do not follow the Taylor-rule in any strict way. The actual stance of monetary policy is found to be tight in the early period of analysis, but found to be loose since 2007, relative to the calibration outcomes. Empirically, it appears that the Federal Funds Rate is the most significant factor affecting the behavior of Saudi interest rate, given the fixed exchange rate with the USD. However, there seems to be a modest accommodation of monetary policy to productivity growth, diversification efforts, and the need for increased financial intermediation over time.

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