Monetary Policy Response to Oil Price Shocks in Algeria: By Using a Bound Testing Approach (ARDL)
Keywords:
Monetary policy, Oil Prices Shocks, ARDL, Impulse Response FunctionsAbstract
Objectives: This paper aimed to examine the mechanisms through which oil price fluctuations impact indicators of monetary stability, as well as the monetary policy responses to oil shocks. It begins with a review of the historical development of oil prices from 1970 to 2018.
Methods: The paper reviewed monetary policy measures in Algeria and employed the Autoregressive Distributed Lag (ARDL) approach to estimate an econometric model that included five variables: real GDP, real world oil price, inflation rate, real exchange rate, and money and quasi-money. The study utilized annual time series data from 1970 to 2018.
Results: The study found that geopolitical crises are the primary cause of oil shocks. In response to falling oil prices, the Bank of Algeria implemented three main measures: devaluing the exchange rate, purchasing sovereign debt, and engaging in unconventional financing. The econometric analysis revealed a cointegrating relationship among the study's variables. The impulse response function test indicated that two variables—inflation and the monetary mass—were most affected by oil price shocks.
Conclusions: The Bank of Algeria must manage the substantial liquidity introduced through unconventional financing operations. Additionally, the bank should adopt a tight monetary policy during periods of inflationary pressure. Finally, monetary authorities should enhance the role of interest rates as a tool for transmitting the effects of monetary policy.
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