OIL REVENUE AND STATE BUDGET DYNAMIC RELATIONSHIP: EVIDENCE FROM BAHRAIN

Abstract

The main purpose of the study is to investigate the short run and long run relationship between government revenues and government expenditures in Bahrain over the period from 1990 to 2017. Using annual data and time series analysis, the study indicated that the above two variables, government revenues and government expenditures were integrated of order one when both Augmented Dickey-Fuller (ADF) and Phillip-Perron (PP) unit root tests were applied. The empirical results have revealed that unidirectional causality runs from government revenues to government expenditures. Thus, there is evidence in support of “revenue-spend” hypothesis. Finally, the results revealed that a 1% increase in oil revenue induces an increase in government expenditures by 1.37%. Therefore, policymakers in Bahrain should focus to further diversify the sources of government revenues from non-oil sectors in such a way that the country will be immune to vulnerability, especially when world oil market performs poorly.Keywords: Oil revenues, Cointegration, Government expenditures, Government revenues, Granger causality, Bahrain.JEL Classifications: E62, H20, H30, C30, C40, C51DOI: https://doi.org/10.32479/ijeep.6991