Dynamic relationships between oil revenues, government spending and economic growth in an oil-dependent economy

- We study the causality between oil revenues, government spending and economic growth in Bahrain.
- We perform an econometric model based cointegration analysis and the error-correction model.
- Results reveal that oil revenues are the main source of financing government expenditures.
- The volatility of oil revenues may hinder the overall economic growth.
- Bahrain needs to diversify further its economy.

The aim of this paper is to empirically examine the dynamic relationships between oil revenues, government spending and economic growth in the Kingdom of Bahrain. Oil revenues are the main source of financing government expenditures and imports of good and services. Increasing oil prices in the recent years have boosted public expenditures on social and economic infrastructure. In this paper, we investigate whether the huge government spending has enhanced the pace of economic growth or not. To this end, we use a multivariate cointegration analysis and error-correction model and data for 1960-2010. Overall results suggest that oil revenues remain the principal source for growth and the main channel which finance the government spending.