Volume 16, Issue 1 -

We examine and test the validity of the expectation hypothesis of the term structure (EHTS) of interest rates in Saudi Arabia using the traditional single equation approach, Campbell and Shiller methodology, Error Correction Model, and monthly data over the period June 1983 to December 2014. The results of the single equation approach indicate that the test of validity of the expectation hypothesis cannot be rejected for all maturities. We also find that the validity of the EHTS of interest rates is supported through the stationarity of the term spreads between short- and long-term interest rates. Moreover, the cointegration test reveals the existence of a cointegration relationship between short- and long-term interest with (1−1)$\left(1-1\right)$ cointegrating vector, suggesting the validity EHTS of interest rates. Policy implications based on the empirical results suggest that the transparency of monetary policy in Saudi Arabia and the effective role of the Saudi Arabian Monetary Authority (SAMA) in conducting monetary policy increase the predictive power of market participants of future movements of short-term interest rates.

The structural transformation of countries moves them towards more sophisticated, higher-value products. Network analysis, using the Product Space Methodology (PSM), guides countries towards leading export sectors. The identification process rests on two pillars: (1) available opportunities, that is, products in the product space that the country does not yet export which are more sophisticated than its current exports; and (2) the stock of a country’s accumulated productive knowledge and the technical capabilities that, through spillovers, enable it to produce slightly more sophisticated products. The PSM points to a tradeoff between capabilities and complexity. It identifies very basic future products that match the two countries’ equally basic capabilities. Top products are simple animal products, cream and yogurt, modestly sophisticated plastics, metals and minerals such as salt and sulphur for Egypt; and slightly more sophisticated products such as containers and bobbins (plastics) and broom handles and wooden products for Tunisia, which is the more advanced of the two countries. A more interventionist approach steers the economy towards maximum sophistication, thus identifying highly complex manufactured metals, machinery, equipment, electronics and chemicals. Despite pushing for economic growth and diversification, these sectors push urban job creation and require high-skill workers, with the implication that low-skilled labour may be pushed into unemployment or into low-value informal jobs. A middle ground is a forward-looking strategy that takes sectors’ shares in world trade into account.