The Impact of Public Expenditure on Inflation: An ARDL Approach

Abstract

The aim of this study is to investigate and evaluate the impact of public spending on inflation in Algeria from 1973 to 2022. The data used are obtained from the official website of world Bank (WDI) and the Finance Ministry of Algeria. This study is conducted by applying the Auto-Regressive Distributed Lag model (ARDL)-(bounds testing approach) using eviews13 software. The time series of the data were subjected to statistical tests by applying the Augmented Dickey-Fuller (ADF) test. The cointegration tests were also applied for a common relationship and the Model Stability: The Bounds Test for confirming the existence of a stable long-term relationship, the Breusch-Godfrey serial correlation LM test to test the absence of serial correlation, Test Breusch-Pagan-Godfrey to test the Heteroskedasticity; and the CUSUM and CUSUM Squares test for the stability of the model as well as the estimation of the model’s short- and long-term parameters. The results obtained confirm the hypothesis posed in the introduction on the existence of a cointegration relationship between public expenditure and inflation the indicate that there exists a cointegration relationship between public expenditure and inflation, such that a 1% increase in public spending leads to a 0.23% rise in the inflation rate. It is important to mention that this percentage is relatively low compared to the short term, having reached 2%. As regards the other control variables, we found a positive and statistically significant correlation between the inflation rate and the percentage of broad money to GDP and the percentage of imports to GDP. However, we found an inverse relationship between the inflation rate and GDP per capita at constant 2015 prices, which serves as a measure of inverse economic growth. Based on these results, we can suggest Moving forward, policymakers in Algeria must prioritize measures aimed at curbing inflation while ensuring sustainable economic growth. This may involve reassessing public spending priorities, implementing effective monetary policies, and enhancing fiscal discipline. Furthermore, fostering economic diversification and promoting investment in sectors with high growth potential can contribute to reducing reliance on public expenditure as a driver of inflation.