Oil price fluctuations are a major source of disturbance for the economies of oil producing countries. In this study, a vector Autoregression Model, Vector Error Correction Model and Structure VAR Model were all estimated using seven key macroeconomic variables for state of Kuwait. A quarterly data were for the period 1984:1 ? 1998:4 for those seven variables which were used to estimate the various models.
All three estimated models indicate a high degree of interrelation between major macroeconomic variables. The results also highlighted the causality running from the oil prices and oil revenues, and government development and current expenditure, towards other variables. The most striking result is that government fiscal stimuli is the main determinant of domestic prices, while monetary stimuli have the least results. The policy implication of this is that fiscal policy can be used more effectively to stabilize the domestic economy after an oil shock.