Endogenous and Exogenous Money Concepts: An Empirical Investigation from the Kingdom of Saudi Arabia

This study examines the long run equilibrium relationship between the demand for loans and deposits in the Kingdom of Saudi Arabia (KSA) using the Cointegration technique. In addition, the study investigates both the short run dynamics and the direction of the causality in the long and short run between the demand for loans and deposits in order to test the endogeneity/ exogeneity of money supply utilizing the vector error correction model (VECM) technique and the Wu-Hausman exogeneity test. The Cointegration test indicates the existence of long run equilibrium between loans and deposits. The causality tests indicate that there is a unidirectional causal relationship from deposits to loans in the long but not in the short run. In addition, the Wu-Hausman exogeneity test indicates that the null hypothesis of exogeneity of loans and GNPin the deposits equation could not be rejected. This result indicates that money supply is not endogenous since the demand for credit does not create money. Instead, one may conclude that money supply is mostly exogenously determined under the control of the Saudi Arabian Monetary Agency (SAMA).