Discovering the Link between Algerian Inflation and Inflation Uncertainty Using Markov Switching Model

Kamel Si Mohammed,Sidahmed Zenagui,Abderrezzak Benhabib,Morad Smail

doi:10.5901/mjss.2015.v6n4s3p241

Abstract

Inflation appears as a first challenge for recent economy performance in Algeria. This study uses the Markov Switching model to examine the relationship between Algerian Inflation and inflation Uncertainty using quarterly data for the period 1974-2014. The main result supports the Friedman-Ball hypothesis for the Algerian case that there is a positive association between the level of inflation and inflation uncertainty. This means that the increase in the level of inflation in Algeria leads to a rise in inflation uncertainty. DOI: 10.5901/mjss.2015.v6n4s3p241

Highlights

The first half of the 1970’s is characterized by the continuing stability of the Algerian inflation rate oscillating between 3 to 6%
From the beginning of the second decade of the new millennium, inflation rates increased to ranges between 6 to 8.5% to such an extent that it has become necessary for policy makers to grasp inflation trends with their uncertainties
In order to bring out the evolution over time of monetary policy, we shall be using the Markov Switching Model to examine the relationship between Algerian inflation and inflation uncertainty upon quarterly data for the period 1974-2014

Summary

Introduction

The first half of the 1970’s is characterized by the continuing stability of the Algerian inflation rate oscillating between 3 to 6%. From 1975 to 1988, inflation registered high trend with an average annual rate of 9.96%. This peak can be explained by many reasons, mainly the adaptation of new Algerian exchange rate regime that has become based upon a basket of 14 currencies instead of the strict begs. Study is to estimate a time-varying Markov Switching Model of inflation producing measures of inflation uncertainty in Algeria. In order to bring out the evolution over time of monetary policy, we shall be using the Markov Switching Model to examine the relationship between Algerian inflation and inflation uncertainty upon quarterly data for the period 1974-2014.

Literature Review

Econometric approach

Results and Comment

Conclusion