Inflationary Effects of Budget Deficits in Algeria: An Econometric Approach.

Abstract

This paper aims to provide empirical evidences about the extent to which budget deficits contribute to influencing price stability within the Algerian economy, using unconstrained VAR models, and based on annual data base covering the period (1990-2019). The results of Granger causality tests revealed the absence of causal relationships between budget deficit and money supply in either direction, which means that budget deficit doesn't affect prices through the monetary channel, which doesn't support the fiscal dominance hypothesis (SW-H). Same results indicated that there're two-way causal relationships between budget deficit and price levels, which indicates a direct impact of budget deficit on prices, in line with the theory of financial origin of inflation (FTPL). These results were confirmed by the results of impulse response functions and variance decomposition, which showed that an important part of inflationary pressures in the Algerian economy is directly fueled by imbalances in the government budget.

Keywords

• budget deficit
• inflation
• var models
• algeria.