Impacts of Money Supply Inflation and Exchange Rate in Kuwait

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It is majorly a state dictated economy and it maintains a pegged exchange rate against a basket of currencies.It is surprising to note that 9% of the entire world’s crude oil reserves lie within the relatively smaller geographical boundaries of this nation. Thus, understandably, 50% of GDP, 90% of exports and 95% of the Governments revenue are attributable to Petroleum in Kuwait. The economy, however, does not have any arable land and additionally, its water resources are also very scarce. So, there is not much scope of primary production in Kuwait. However, since it is abundant in one of the most essential resources in the world, Kuwait has retained its spot as one of the richest economies in terms of per-capita income.Exploring macroeconomic relations in Kuwait is particularly interesting because these above-mentioned features make it distinct from the standard large economies which form the basis for the macroeconomic theory. Neoclassical, Keynesian and post-Keynesian macroeconomic doctrines have all evolved from the primary motive of explaining much of the economic history of the US economy since the great depression. While all major developing economies saw detrimental output and employment trends in the mid-1970s due to the oil price shock, this was a period of unprecedented economic growth for oil-producers like Kuwait. It would be therefore interesting to explore the nature of macroeconomic relationships in an economy which is evidently distinct compared to the economies that have served as benchmarks for standard textbook macroeconomics.This paper explores how changes in the money supply, inflation, and exchange rate affect the GDP. It is found that increases in the money supply have a relatively small but significant positive impact on the GDP. Increases in the exchange rate are found to have a very strong negative impact on the GDP.