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This paper extends “Assessing the Resilience of Saudi Banks to Weaker Economic Conditions” published in IMF Country Report No. 15/286. This and earlier versions of this paper benefitted from extensive discussion with the Executive Directors and Saudi Arabian Monetary Agency staff. The author is grateful to Tim Callen, Javier Hamann, Phakawa Jeasakul, Padamja Khandelwal, Ananthakrishnan Prasad and seminar participants at the IMF and the Saudi Arabian Monetary Agency. Any errors are the author’s responsibility.
Funke (2004) uses a panel of 16 emerging markets and finds a small but statistically significant stock market wealth effect. Cho (2006) finds stock market wealth effect in Korea for the highest income bracket households who typically hold a large share of corporate stock. Peltonen et al (2012) analyze a panel of 14 emerging economies and find that the wealth effect on consumption is stronger for countries with higher stock market capitalization. See Hesse (2008) for a summary. Market capitalization in Saudi Arabia was somewhat below 80 percent of GDP in 2014, considerably below the 100–370 percent of GDP witnessed during 2004–08, but comparable to the ratio for other GCC countries at present.
As the fixed effects are correlated with the regressors due to lags of the dependent variables, the mean-differencing procedure commonly used to eliminate fixed effects would create biased coefficients. The orthogonality between transformed variables and lagged regressors is preserved by forward mean-differencing (the Helmert procedure in Arellano and Bover, 1995), which removes the mean of the future observations. Then, lagged regressors are used as instruments to estimate the coefficients by system GMM.
Our panel VAR model does not yield plausible results when logit transformed NPL ratios are used. Therefore we used un-transformed NPL ratios.
0.02/(1-0.85) = 0.13 where 0.85 is the autoregressive coefficient of the NPL ratio.