A DSGE model for the interaction between monetary and fiscal policies: Case of Algeria

Abstract

Small open resource-rich economies such as Algeria, present certain characteristics that significantly increase their vulnerabilities to external shocks in general and resource related shocks in particular. This thesis embraced three chapters that deal mainly with monetary and fiscal policies and their interaction, both domestically and internationally. The aim of this study is to present an empirical framework for the interaction between monetary and fiscal policies in Algeria as an oil dependent economy using a New Keynesian Dynamic Stochastic General Equilibrium model (NK-DSGE) for small-scale open economy estimated using a Bayesian approach (1980-2018) Our results revealed that a 1% negative resource-price shock contracts output, depreciates the real exchange rate and increases inflation. In response, the central bank embarks on contractionary monetary policy while primary deficit increases. We find evidence of active monetary policy and passive fiscal policy over the most sample. Contrary to expectation, taxes have a non-significant and a weak reaction to debt. Thus, government expenditures play a more significant role than taxes in stabilising debt. In addition, the reduction in government spending in response to lower oil revenues and aggregate output signifies fiscal pro-cyclicality. This thesis contributes in breaking new ground to address the gap in the DSGE-Algeria related literature and to give a share in the understanding of monetary-fiscal interactions in developing resource-rich economies.