Fiscal Policy Shocks and Real Exchange Rate Dynamics: Empirical Investigation in the case of Algeria–An

Abstract

The aim of this paper is to measure the impact of government revenue and government expenditure on real exchange rate dynamics in Algeria, using a Vector Auto regression (VAR) approach, based on annual data covering 1970-2011 period, depending on seven key macroeconomic variables: government revenue, government expenditure, real gross domestic product, consumer price index, real exchange rate, the nominal interest rate and oil prices, in particular to shed light on the possible effects of fiscal imbalances on the real exchange rate. the results of the study are as follows: a positive structure shock in both revenues and government expenditures estimated at 1% would cause a positive responses on both real GDP and interest rate, jointly with real appreciation, was confirmed by testing the variance decomposition where it became clear that fiscal shocks are the main driving force of real exchange rate fluctuations. Finally, depending on the results the paper recommends that the fiscal policy should be encouraging productive government investment in addition to subject projects to the standards of economic yield, which will give a positive impulse to improve the value of the national currency, in addition to direct the investments towards non-oil sectors.