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The main objective of my article, (Darrat, 1984), was to examine the sensitivity of domestic money demand in Saudi Arabia to changes in external monetary and financial factors such as foreign interest rates. Regression results over the quarterly period 1962/I‐1981/IV indicated that the Saudi money demand was significantly influenced by movements in foreign short‐term interest rates and currency exchange rates.

Kuwait's banking system has experienced considerable difficulties in the past two decades due to financial and political shocks. In the aftermath of the Gulf War, government financial support re‐established confidence in the financial system, allowing banks to restore their balance sheets and increase profitability starting in the mid 1990s. This paper examines the performance of banks in Kuwait during the period of financial renaissance, 1994–1997. We provide an empirical assessment of the efficiency, productivity, and technological progress of banks on the basis of the Data Evelopment Analysis and the Malmquist Index. The empirical results suggest that Kuwaiti banks fail to optimally utilize a significant proportion of their resources. The sources of bank inefficiency appear to be both allocative (regulatory) and technical (managerial) in nature. The results also indicate that smaller banks in Kuwait are more efficient than larger ones, although all banks have improved their efficiency‐levels and experienced some gains in productivity.

Contrary to the restrictive bivariate results of Saunders (1995), our findings from open‐economy multivariate models accord with the conventional IS/LM apparatus and decisively support the use of fiscal policy as a key macrostablization tool in the U.S. economy. We provide theoretical explanations for our results and produce empirical evidence for their robustness.

In this rejoinder, I should like to emphasise, once more, that my original article was intended as a statistical inquiry into the Saudi money demand relationship. As such, its main purpose was to explore whether foreign interest and currency exchange rates exert significant (statistically non‐zero) effects on domestic money holdings in Saudi Arabia. As the results in my Reply show, the use of non‐oil GDP that was suggested by Professor Fadil did not alter my original finding that these external factors do significantly affect the Saudi money demand.

This study examines empirically the stability of the demand for money under two different financial systems. One system pays interest on money deposited at the bank and charges interest on bank loans; the other does not pay interest on money deposited in the bank, and enters into a profit‐sharing contract with the bank borrower instead of charging interest on bank loans. The first system resembles the western financial system and the second resembles the Islamic financial system. A study by Darrat (1988) studies the behavior of demand for money in Tunisia, and concluded that interest‐free money is more stable than the interest‐bearing money. The behavior of demand for money in fifteen countries has been analyzed in this research in order to find out if the findings by Darrat (1988) are applicable to other countries that practice Islamic banking. This study finds that the velocity of money and its variance are lower for interest‐ free banking system than for interest‐bearing banking system. This result may support the hypothesis that interest‐free money is more stable than interest‐bearing money. The monetary policy implications of interest‐free banking are also analyzed.

This paper re‐examines recent claims in the literature that foreign trade (economic openness) plays no role in the Taiwanese economic growth once human capital is taken into account. We show that such a claim lacks weight and is primarily the outcome of model misspecification. In the context of properly specified models, results from cointegration, error‐correction models, and variance decompositions all suggest that economic openness is a significant catalyst of growth in Taiwan over and above any growth contribution of human capital accumulation.

The empirical estimates for the money demand function reported here are based on quarterly time series for Saudi Arabia for the period 1962/I to 1981/IV. The money demand function estimated in this article is novel in that it takes into account the potential effect of external monetary and financial factors on domestic money de‐mand in the open economy of Saudi Arabia. The empirical results show that these external factors (foreign interest rates and exchange rates) do play an important role in the Saudi money demand function. Hence, the Saudi monetary authorities should not ignore the response of domestic money demand to these external factors in formulating their stabilisation policies. The empirical evidence also indicates that the inflationary expectations and permanent real income variables exert significant influences on money demand, with the latter variable exhibiting a unitary long‐run elasticity. Finally, the estimated money demand equation is found to be structurally stable over time.

The primary purpose of this article is to investigate empirically for the US the potential impact of monetary and fiscal policy upon real economic activity using the “St. Louis equation” approach. Only lagged values of the policy variables are included in the estimation to ensure their statistical exogeneity. Hsiao's (1981) multivariate technique is employed to determine the model lag specification. The empirical results suggest that only fiscal policy as measured by high‐employment tax changes can exert a significant lasting impact upon real GNP. Monetary policy, on the other hand, has only a temporary effect on real GNP. The results also show that both monetary and fiscal policy have significant and permanent effects on nominal GNP, the former via its permanent effect on prices and the latter through its permanent effect on real GNP.

This article presents a general equilibrium model capable of assessing the impact of foreign price shocks on the real side of the oil‐based developing economies. The theoretical model departs from previous work in this area at least in that (1) the model takes into account endogenous income and price responses in all sectors of the economy; (2) it has two traded goods (exports and imports) and a non‐traded good; (3) it explicitly addresses the inherent open and small economic nature of developing countries; and (4) besides adjustments in the endogenous domestic prices, the model also allows for other structural adjustments. As such, the model combines the neoclassical macro theory with the structural micro approach. Empirical evidence deduced from an important oil‐based developing economy (Saudi Arabia) appears quite consistent with the model theoretical implications.

This article investigates empirically the determinants of inflation in Saudi Arabia using the quarterly time‐series data over the period 1962:1 to 1981:IV. The basis of this investigation is the monetary approach whereby the roles of both the money‐supply growth and the money‐demand growth are taken into account. Moreover, the potential effect of external monetary factors on the Saudi inflation is genuinely incorporated through the underlying money‐demand function. The proposed monetary model provides an adequate explanation of the Saudi inflationary process. Furthermore, the empirical results exhibit structural stability over time and do not suffer from simultaneous‐equation bias. The empirical results show that external monetary factors (particularly foreign interest rates) and inflationary expectations exert significant positive effects on inflation in Saudi Arabia. Importantly, the results also indicate that money‐supply growth has a quick and powerful positive impact upon the Saudi inflation with a unitary elasticity. Therefore, control over money‐supply growth appears an essential ingredient in any anti‐inflation policy in Saudi Arabia. Such monetary control can only be achieved in Saudi Arabia (and other oil‐exporting countries) through control over domestic government expenditures that have escalated particularly during the past decade.