Abstract
The principal objective of this study is to investigate the relationship between monetary policy and growth of the manufacturing sector in Algeria. Using a structural vector autoregressive model and quarterly frequency data for the period 1980Q1 to 2010Q4, the study finds no evidence that money supply responds to fluctuations in manufacturing sector growth or Gross Domestic Product (GDP) growth. Interest rates, however, are seen to explain nearly a third of the variations in manufacturing output growth, suggesting that the manufacturing sector is sensitive to interest rates. The study also reveals that money supply variations are largely explained by changes in interest rates. A peek at the monetary transmission process reveals that Algeria employs monetary aggregates as the primary operating tool of monetary policy. The monetary authorities adjust total money supply in response to any movements in the rate of interest, probably to keep the rate of interest within a certain target given other developments in the fundamentals. The interest rates, in turn, play an important role in determining variations in manufacturing sector growth. In addition, the interest rates significantly affect exchange rates, which are observed to respond to changes in overall GDP growth. It is the overall GDP growth that has the largest influence on manufacturing sector growth, probably due to strong forward and backward linkages between the manufacturing sector and other sectors of the economy. Keywords: Monetary policy, transmission mechanism, manufacturing output, oil price shocks. JEL Classifications: E23, E31, E52
Highlights
Located in North Africa on the Mediterranean coast, Algeria is the largest country in Africa
gross domestic product (GDP) growth accounts for 6.71 percent, 24.67 percent, 29.14 percent and 29.14 percent of the variations in the rates of inflation after three, six, nine and twelve months, in that order. It is further observed in the table that money supply growth, exchange rates and growth of manufacturing sector output individually contribute less than one percent to the inflation rates fluctuations in each of the third, sixth, ninth and twelfth periods, in that order. These results show that while monetary authorities in Algeria do not use interest rates as the main operating tool of monetary policy to curb inflationary pressures as observed in Table 1, interest rate adjustments are very effective in driving inflation rates in a particular direction
This study set out to investigate the relationship between monetary policy and growth of the manufacturing sector in Algeria taking into account the high level of oil production in the country
Summary
Located in North Africa on the Mediterranean coast, Algeria is the largest country in Africa. The country relies on natural gas exports to Europe and on oil production. It has the 17th largest oil reserves in the world and it is the second largest producer of oil in Africa after Nigeria. Oil is the largest foreign exchange earner for the country and it accounts for the largest proportion of the country’s gross domestic product (GDP). The oil sector contributes about 46.4 percent to the country’s GDP (2007 estimate) and accounts for 97 percent of the total export earnings. The situation is nearly the same for almost all of Africa’s oil exporting countries (AOECs). The enormous financial resources generated from oil production in the AOECs, have not translated into overall economic development (World Bank, 2012; International Monetary Fund (IMF), 2010). The prevalence of unemployment, poverty, large quantities of imported manufactured goods, decaying infrastructure, unreliable power supply and low human development (as measured by the Human Development Index) are examples of the poor state of these economies
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