Master of Science
Kingdom of Saudi Arabia (KSA) and the United Arab Emirates (UAE) have a strong economic, social and cultural relationship for generations. However, the KSA’s economy is the largest economy in the Gulf Cooperation Council area. This research paper is an attempt to understand the effects of the KSA’s economy on the UAE’s economy. Using cointegration and Vector Error Correction Methods (VECM), we examine the long-run relationship among macroeconomic variables of the KSA and the UAE and also explore the short-run relationships. We find that there exists a stable long run relationship between the KSA’s macro variables with the UAE’s output, money supply, and inflation. We also find that the shocks in the KSA’s real GDP, money supply and inflation rate have significant impact on the UAE’s economy. Consequently, the policy makers of the UAE should pay close attention to what is happening in the economy of the KSA.