Oil price shocks—money supply causality: Some evidence from Algeria

Abstract

When oil exports provide most of a country's fiscal revenue, the causal relation between international oil price shocks and money supply variations may be instrumental to monetary policy conduct. Responding to this causal relation and apprehensive about excess monetary liquidity risks, Algerian policymakers have recently adopted new measures aimed at sterilising the country's excess hydrocarbon export revenues. This study will test for the causal relation between oil prices and Algeria's money supply during the 1970–2002 time period. Econometric estimation reveals the surprising result of no significant presence of Granger causation between the two variables. However, further examination shows a relation instead with the country's total oil exports. Finally, using the bootstrapping technique, simulation results show that a negative and significant correlation has characterised the association between oil exports and the country's money supply. These findings are consistent with the country's recent economic stabilisation efforts to sterilise excess monetary liquidity.