Macro-Econometrics Model for Kuwait Economy: Policy Simulation and Analysis

Abstract

Resembling most countries in the world, Kuwait had multiple attempts to estimate the wide macro-econometric models for its own economy. These models are based entirely on annual time series data. The aim of this paper is to develop a macro-econometric model for Kuwait’s economy based on quarterly time series data. Accessibility of quarterly GDP data is vital for economic analyses and decision-making process. The quarterly GDP gives a wide understanding of the general economic activities, especially on the fluctuations of business cycle and on the economical turning points. The purpose of this paper is the specification of the first Kuwaiti quarterly macroeconomic model and it's estimation using quarterly data from first quarter 1995 to fourth quarter 2012. This paper lays empirical groundwork for macroeconomic models. I have complies, expanded and improved a Kuwaiti macro-financial dataset at quarterly frequency. I make use of optimization method to transform GDP from annual basis to quarterly frequency. The construction process of the quarterly macro-monetary model has taken into consideration the theoretical and practical argument concerning the inclusion of various variables and their role in forecasting key macroeconomic variables. Estimation results using GMM are highly significant and the main diagnostic tests indicate that the model is well specified. Accordingly, the model has been tested for short run quarterly forecasting over the period from first quarter 2013 to fourth quarter 2015.  Assessments of the model implications for an array of shocks that were often examined in policy simulations were performed and concluded that model output was consistent with macroeconomic theory, particularly with regards to short run/long run impacts.