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PAGE PAGE 4Oil price fluctuations and their impact on the macroeconomic variables of Kuwait： a case study using a VAR modelSUMMARYIn this study， a vector auto regression model (VAR) and a vector error correction model (VECM) were estimated to examine the impact of oil price fluctuations on seven key macroeconomic variables for the Kuwaiti economy. Quarterly data for the period 1984 - 1998 were utilized. Theoretically and empirically speaking， VECM is superior to the VAR approach. Also， the results corresponding to the VECM model are closer to common sense.However， the estimated models indicate a high degree of interrelation between major macroeconomic variables. The empirical results highlight the causality running from the oil prices and oil revenues， to government development and current expenditure and then towards other variables. For the most part， the empirical evidence indicates that oil price shocks and hence oil revenues have a notable impact on government expenditure， both development and current. However， government development expenditure has been influenced relatively more.The results also point out the significance of the CPI in explaining a notable part of the variations of both types of government expenditure. On the other hand， the variations in value of imports are mostly accounted for by oil revenue fluctuations and then by the fluctuation in government development expenditures. Also， the results from the VECM approach indicate that a significant part of LM2 variance is explained by the variance in oil revenue. It reaches about 46 percent in the 10th quarter， even more than its own variations.KEY WORDS： vector auto regression (VAR); oil fluctuation; Kuwait1. INTRODUCTIONThe post-1973 effects of the oil boom on the economies of Arab oil producing countries have been diverse， though on balance， many of those governments might look back on the period 1973 – 1986 as a mixed blessing. Income on the oil account certainly rose rapidly， but so did price