Exchange rate pass - Through in Algeria

Abstract

This paper examines the exchange rate pass-through on producer and consumer price indexes in the Algerian economy through an empirical analysis using a VAR Model (Vector Autoregressive Model) upon quarterly data for the 2002-2011. The empirical findings show that the consumer price increases in response to an appreciate foreign exchange rates against the Algerian Dinar, while the pass-through of Euro against the Algeria Dinar exchange rate is ‘complete’ and more increasing in the time horizon compared the pass-through of US dollar /DZ exchange rate. In the contrast, the exchange rate pass-through involves a negligible reaction on producer price index (PPI). In the second step of the variance decomposition estimate, the magnitude contribution of demand shocks to explain CPI and PPI change is ranges from 50% and 17% after thirty quarterly respectively, whereas supply shock (oil price) continue to contribute largely to CPI fluctuations (30%) and quite modestly to PPI (5%). For the main explanations can be explain these results are consist firstly by an increase in world commodity prices and dismantling Algerian trade barriers after entered into force of the Euro-Mediterranean Agreement establishing an Association without mentioning that this union is the largest trading partner about 1/2 of the Algerian imports. Moreover, the quite modest of pass-through on producer prices clearly reflect the Dutch Disease effect on Algeria economy and highlighted how the manufacture sectors is underdeveloped, while it’s emphasizes how the policy maker help to swell the Algerian imports instead of trying to curtailment by replacing with domestic production.