Oil Price and Dutch Disease: The Case of Algeria

Abstract

This study examines the effect of recent increases of oil price on the key macroeconomic variables of Algeria. We have used the vectoriels auto-régressifs model with linear and non-linear specifications to analyze the data over the period 1995Q1–2007Q3. The findings indicate that the increase in the inflation rate due to oil price shock is the main cause of the real exchange rate's appreciation in the short term. This real appreciation involves a spending effect which could be at the origin of the Dutch Disease.

Keywords:

• Algeria
• Dutch Disease
• oil price
• VAR model

Notes

¹Net Oil Price Increase in 4th Quarter.

*: p-value less than 5%.

*: p-value less than 5%.

*: p-value less than 5%.

²This result is in contradiction with some studies (Bohi, 1989; Bernanke et al., 1997) which indicates that the response of monetary policy in oil price shock presents a significant share of the recession of the economic activity and confirms other studies (Ferderer, 1996; Brown and Yucel, 1999; Hamilton and Herrera, 2004).