Financial Development and Natural Resources Dynamics in Saudi Arabia: Visiting ‘Resource Curse Hypothesis’ by NARDL and Wavelet-Based Quantile-on-Quantile Approach

Abstract

This study analyses the impact of natural resource rent on financial development to test the resource curse hypothesis in Saudi Arabia on quarterly data span from 1985Q1 to 2017Q4. We employ two novel methodologies at same time such as nonlinear autoregressive model (NARDL) and Wavelet-based quantile-on-quantile estimation to check the asymmetric behaviour of natural resource rent on financial development. The findings of NARDL confirm the nonlinear behaviour of natural resource rent with financial development. The results also show real GDP, gross capital formation and institutional quality affect financial development positively. The empirical results of Wavelet-based quantile-on-quantile estimation method also reveal the heterogeneous response of natural resource rent effect when decomposes into different quantiles that become positive to negative. The results further explain that the natural resource rent has a positive effect in short-run, but it exerts an adverse effect on financial development after attaining stability.