EXCHANGE RATE PASS-THROUGH AND INFLATION DYNAMICS IN ALGERIA: A VECTOR AUTOREGRESSION ANALYSIS OF SHORT- AND LONG-TERM EFFECTS
Abstract
This study investigates the bidirectional and time-varying interplay between exchange‐rate movements and inflation in Algeria from 1990 to 2023. Employing a Vector Autoregression (VAR) framework on quarterly time-series data, it quantifies how exchange-rate shocks transmit into price levels and, conversely, how unexpected inflationary episodes feed back into currency valuation. The analysis also controls for key external and policy-related drivers—namely, global oil prices and domestic monetary‐policy interventions—to isolate each variable’s independent effects.
Empirical findings reveal a significant, though transitory, pass-through mechanism: a depreciation of the Algerian dinar leads to a marked uptick in inflation over subsequent quarters, while positive inflation shocks exert downward pressure on the dinar’s real exchange rate. However, long-run causality between the two series remains inconclusive, suggesting that neither variable unilaterally dictates the other over extended horizons.
Based on these insights, the study recommends adopting an explicit inflation-targeting regime, deepening and liberalizing the foreign-exchange market, and enhancing policy transparency. It further advocates diversifying government revenues and strengthening the investment climate, alongside continuous monitoring of macroeconomic indicators to support timely policy adjustments.
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