Identifying Algeria’s de facto exchange rate regime: a wavelet-based approach

Abstract

Abstract The Central Bank of Algeria has announced a managed float of the Algerian dinar since 1994. Yet, there are some substantial differences between various de facto classifications of Algeria’s exchange rate regime. This study looks into the exchange rate regime of Algeria, aiming to identify de facto regime. To identify the implicit basket weights for the Algerian dinar, first the OLS rolling window methodology is used to estimate the celebrated Frankel-Wei regression. Then, the wavelet-based methods are applied to study the co-movement patterns of the exchange rates of the Algerian dinar, US dollar, and Euro. In the main, the OLS rolling window results show that the US dollar and the Euro are the currencies with the most influence over the Algerian dinar. Further, from the Wavelet Multiple Correlation (WMC) results, the US dollar is identified as the potential leader in the implicit basket for the Algerian dinar. Additionally, from the Wavelet Local Multiple Correlation (WLMC) results, it is found that the Algerian DZD, US dollar, and Euro are highly correlated, with a correlation value around 0.90 for most of the time scales. Based on the results obtained, we suggest that Algeria’s exchange rate regime could be a crawling peg and band around the US dollar and Euro.

Keywords

• Exchange rate regimes
• Fear of floating
• Frankel-Wei regression
• Rolling windows
• Wavelet analysis
• Algeria